# Pay Yourself First: How and Why to Prioritize Savings

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## What Is Pay Yourself First?

"Pay yourself first" is a financial strategy that prioritizes an individual's savings. It helps people tackle their financial goals and build value for the future. Pay yourself first involves immediately saving a certain portion of money from any income you receive, before spending it. By committing to saving regularly, you can build a financial cushion to apply to your financial priorities. Pay yourself first could help you achieve long-term financial objectives like retirement or emergency savings. However, many people don't earn to earmark some portion of every paycheck for savings. They must spend it all on necessities. Keep in mind that you can still build savings by putting aside some money whenever possible.  

### Key Takeaways

*   "Pay yourself first" means prioritizing savings by setting aside money before paying bills or making purchases.
*   The strategy aims to maintain and increase consistent savings, contributing to long-term financial security.
*   Many Americans struggle with emergency savings, with over a third unable to cover a $400 expense.
*   Regularly contributing to savings and retirement accounts can help build a financial cushion for future needs.
*   Using tax-advantaged accounts like Roth IRAs for emergencies should be a last resort due to potential penalties.

## Strategies to Boost Your Savings

Many personal finance professionals and retirement planners tout the "[pay yourself first](https://www.investopedia.com/are-you-paying-yourself-first-11729093)" method as an effective way to ensure you contribute to savings month after month. Regular savings contributions can go a long way toward building a long-term nest egg.

If you are using the "pay yourself first" method of personal finance, you may opt to put your money in a range of savings vehicles, depending on your financial objectives. The phrase can refer to earmarking a certain percentage of your paycheck to be contributed to your retirement accounts, such as a [401(k)](https://www.investopedia.com/terms/1/401kplan.asp) or an [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp). Alternatively, you may put the funds in a cash savings account.

Paying yourself first means saving for retirement, building an [emergency fund](https://www.investopedia.com/terms/e/emergency_fund.asp), or saving for long-term goals like a [home](https://www.investopedia.com/homebuying-guide-4776300).

> **Important**
>
> If you manage it, paying yourself first can reduce stress by covering retirement and emergency needs like car repairs or medical bills.

## What Percentage of Americans Are Saving Money?

In 2023, over a third (37%) of Americans could not cover a $400 emergency in cash or its equivalent, a Federal Reserve report found. This is the same as it was in 2022, but a bit higher than it was in 2021 (32%). In 2023, a similar percentage of people believed their retirement savings were on track (34%), which was about the same in 2022 (31%) but lower than it was in 2021 (40%).

According to Bankrate's Annual Emergency Savings Report, over 27% of respondents had no emergency savings at all, and about the same percentage (29%) had some savings, but less than 3 months' worth of living expenses. 16% had 3 to 5 months' worth of living expenses, and 28% had 6 months' worth of living expenses or more. The breakdown by age reveals that Baby Boomers had far more emergency savings than other generations: almost half (46%) of Baby Boomers had 6 months' worth of living expenses or more, compared to 25% of Gen X, 20% of Millennials, and 11% of Gen Z.

## What Is the Average Retirement Savings by Income?

The Federal Reserve Board found that in surveys conducted from 2016-2022, the average retirement savings among everyone who responded (35 years old to 64 years old) was about $331,000.

The number of families who participated in retirement plans increased to the highest level since 2010.

For those with incomes in the bottom half, the average savings was about $55,000. For those with mid-to-high incomes, the average savings was about $227,000. For those in the top 10%, the average savings was about $913,000.

## Can You Use a Roth IRA As an Emergency Fund?

Some people may avoid contributing to [tax-advantaged](https://www.investopedia.com/terms/t/tax-advantaged.asp) retirement savings plans because they worry about having no money for emergencies. It's important to know, however, that the contributions you set aside for retirement in a [Roth IRA](https://www.investopedia.com/terms/r/rothira.asp) are, in fact, [accessible if needed](https://www.investopedia.com/articles/personal-finance/040714/how-use-your-roth-ira-emergency-fund.asp). Though financial planners caution that this should only be done in emergencies—because withdrawals take money away from your future—the fact is that you can withdraw however much you contributed to the account because you already paid taxes on those funds. These withdrawals are tax and penalty-free.

The rules for earnings are different, however. The earnings in the account (the money your contributions made) are not accessible unless you have had the account for over five years. And if you're younger than age 59 ½, it's considered an early withdrawal, and you'll pay a 10% tax penalty to the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp).

There is an exception to this: you can withdraw earnings tax and penalty-free if you make what's called a qualified withdrawal. For it to be a qualified withdrawal, you must have had the account for over five years, and the withdrawal must either be due to a disability, for a first-time home purchase (or building / rebuilding a first home), up to $10,000, or be for a beneficiary after your death.

And if you're willing to pay taxes on the earnings (though you wouldn't if you wait until you're 59 ½, as long as you've had the account for five years), there are several exceptions to the 10% penalty, including withdrawals for higher education expenses or for the birth of a child.

  

## The Bottom Line

"Pay yourself first" means that when you get paid, you should put money away in savings before you spend it on anything else, such as your regular monthly living expenses or discretionary purchases. By following this strategy, you'll be able to build savings that can help secure your future, and create a cushion for financial emergencies. However, for many people, this strategy can be difficult. But don't worry. Aim to save as much as you can, whenever you can, to build your savings over time. Make your savings a priority whenever possible.

> **Article Sources**
>
> 1.  Board of Governors of the Federal Reserve System. "[Economic Well-Being of U.S. Households in 2023](https://www.federalreserve.gov/publications/files/2023-report-economic-well-being-us-households-202405.pdf)."
>     
> 2.  Bankrate. "[Bankrate’s 2024 Annual Emergency Savings Report](https://www.bankrate.com/banking/savings/emergency-savings-report/)."
>     
> 3.  Board of Governors of the Federal Reserve System. "[Changes in U.S. Family Finances from 2019 to 2022](https://www.federalreserve.gov/publications/files/scf23.pdf)."
>     
> 4.  Internal Revenue Service. "[Retirement Topics: Exceptions to Tax on Early Distributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions)."