Pay Yourself First

Pay Yourself First is a foundational personal finance principle that champions treating savings and investments as the highest-priority expense. Instead of spending money on bills, groceries, and entertainment and then saving whatever is left over (which is often nothing), you flip the script. The moment you receive your paycheck, a predetermined amount is immediately moved into a savings or investment account. This is your 'payment' to your future self. This simple but powerful mental shift transforms saving from an afterthought into a non-negotiable commitment, much like a mortgage or rent payment. It's the bedrock habit for building wealth, as it automates the process of capital accumulation. For aspiring investors, this isn't just a suggestion; it's the essential first step. Without systematically setting capital aside, you can't purchase assets, and the entire journey of investing, especially the patient, long-term approach of a value investor, remains out of reach. It’s the rule that gets you in the game.

The beauty of this strategy lies in its simplicity and psychological power. It directly combats the most common barrier to saving: procrastination and undisciplined spending.

When you save what's left, you are emotionally prioritizing spending. Your wants and needs today take precedence over your financial future. By “paying yourself first,” you make a conscious decision that your future financial security is your most important “bill.” You then learn to live on the remainder, which forces you to be more mindful and creative with your spending. It’s not about deprivation; it’s about aligning your actions with your long-term goals.

The most effective way to pay yourself first is to remove yourself from the equation. Automation is your best friend. By setting up an automatic transfer from your checking account to your brokerage account or savings account for the day after you get paid, you eliminate the temptation to spend the money. It happens in the background, without requiring daily willpower. This “set it and forget it” approach ensures consistency, which is the key to harnessing the incredible power of Compound Interest. Every dollar or euro you invest has more time to work for you, generating earnings that, in turn, generate their own earnings.

Getting started is straightforward. You can set this up in an afternoon and reap the benefits for a lifetime.

Decide how much you are going to pay yourself. A common target is 10-20% of your gross income, but don't be discouraged if that seems too high right now.

• Start Small: Even 5%, or a fixed amount like $100 or €100 per month, is a fantastic start. The habit is more important than the initial amount.
• Be Realistic: Choose a sum you can stick with consistently without causing financial distress. You can always increase it later.

Log in to your online bank or visit your company's HR portal.

1. Set up a recurring, automatic transfer from your main checking account to your chosen savings or investment account. Schedule it for the day after your payday.
2. Some employers allow you to split your direct deposit, sending a portion of your paycheck directly to an investment account and the rest to your checking account. This is the most seamless method.

Where you send the money depends on your goals. For long-term wealth creation, which is our focus here, you want the money to go to an investment vehicle.

• Brokerage Account: This is your gateway to buying individual stocks, low-cost index funds, or ETFs (Exchange-Traded Funds).
• Tax-Advantaged Retirement Accounts: These are powerful tools. In the U.S., this includes a 401(k) (often with an employer match—which is free money!) or an IRA (Individual Retirement Account). European countries have similar tax-efficient pension schemes. Prioritize these to maximize your growth.

Once a year, or every time you get a raise or a bonus, challenge yourself to increase the amount you pay yourself. If you get a 3% raise, try to divert at least half of that increase directly to your investments. This way, you increase your savings rate without feeling a pinch in your lifestyle.

While “Pay Yourself First” is a personal finance rule, it's the launching pad for every successful value investor.

• Building Your 'War Chest': The legendary Warren Buffett has always stressed the importance of having a “war chest” of cash ready. Why? Because the best buying opportunities appear when the market is panicking and great companies go on sale. Paying yourself first is how an ordinary person methodically builds their own war chest, ensuring they have the capital to be “greedy when others are fearful.”
• Forging Discipline: The act of consistently saving and investing, month after month, year after year, builds incredible discipline. This is the very same patience and long-term mindset required to hold a stock through market volatility, waiting for its true value to be recognized by the wider market. It trains you to focus on the long game, not the short-term noise.