Many financial gurus promote the idea of paying yourself first; however, as with many of their ideas they fail to give a step by step practical implementation plan. Should you pretend it’s a bill that’s due every month? Isn’t your 401k deduction taking care of this?

I’m not going to say that there is only one right way to “pay yourself first”, but I will explain how I handle things.

First of all, I don’t count any contributions made to a 401k. These amounts are already being deducted before the money hits my account along with any other deductions such as health insurance, taxes, or flexible spending accounts. What I am concerned with is the money that is actually deposited into my account.

Now, I have set up 3 accounts with my financial institution or bank. There is one checking account and two savings accounts. Yes, it is possible to have more than one checking and savings accounts at your bank. Most banks now have online banking and you can even label your accounts with a nickname to help you remember what they’re for.

I make all deposits into the checking account. One of the savings accounts is a dedicated emergency fund. The other savings account is set aside for investments. Each time a deposit is made or I get paid, I transfer a certain percentage into the emergency fund and another percentage into the investment fund.

The important factor in this is that it happens every time. Once these transfers have been made, what is left over is used for bills and other discretionary spending.

The emergency fund is left alone and not touched unless an “actual” emergency occurs. The money in the investment account is then used for various investments.

Following such a process ensures that I’m committing my money first to my highest priorities. I’m not waiting till the end of the month or what have you to see if I have any money left over to save. Like I said before, this isn’t the only way and maybe not the best way, but it’s a practical plan for “paying yourself first”.

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