What Is PYF? Inside The Personal Finance Rule To Invest in The Future

Many financial planners consider the golden rule of personal finance to be pay yourself first (PYF) — the principle of automatically setting aside money from your income or paycheck as soon as you receive it so that you are doing something immediately to save for future emergencies, retirement or another type of savings.

Legendary motivational speaker and business strategist Tony Robbins said on his website that pay yourself first or PYF is imperative.

“You must decide that a part of all that you earn is yours and your family’s to keep — and you’re not giving it away to anyone else — including Michael Kors or Mercedes-Benz,” Robins’ team wrote. “This is called the PYF percentage — or the Pay-Yourself-First percentage. It is up to you to decide what this percentage is, however, in order to gain real momentum, make it at least 10% …Make it a reality by automating it.”

Setting aside money from each paycheck as soon as you receive it, rather than waiting to see what, if anything, is left over to save at the end of the month means savings is treated as an expense and given a high priority, according to the USDA Cooperative Extension Foundation.

“There will never be anything left over,” wrote Florida investment advisor Steven Clark. “You will always find a reason to spend your money on something.”

Pay yourself first (PYF) works best if savings deposits are automatically deducted from your paycheck, according to the Extension Service. That way, savings will happen regularly and the temptation to spend the money will be minimized.”

Redirecting a portion of the income to savings as soon as you receive it and before you pay any other bills is probably the most important habit you should adopt to help you reach your goals, get peace of mind over your money, and provide choices to you and your family, according to Clark. “Think of it as the golden rule of personal finance.”

Savings is one of the most frequent problems seen by financial professionals, according to financial coach Lori Mann. Counselors hear that their clients have never saved, don’t know where to begin saving and claim they don’t earn enough to save, Mann wrote for the Association for Financial Counseling & Planning Education.

Some have saved before but feel discouraged, frustrated or defeated when they have to deplete their accounts due to an emergency. They give up on trying to save. Many fail to acknowledge that they achieved success with their savings accounts, overlooking the fact that they had the money when they needed it thanks to their savings.

Such mindsets often require an “aha moment” or moment of “cognitive enlightenment,” Mann said, “to embrace the idea they can save, be a saver and actually be very successful at savings.”

Here are some general rules and benefits of paying yourself first (PYF) from Clark Financial Planning Services.

General Rules

• The more you automate the process of moving money directly into various savings accounts from your paycheck the better. Out of sight and out of mind works.
• For retirement savings, commit to saving at least 10 percent of your annual gross income but strive for up to 20 percent during peak earnings years.
• Break emergency savings into two levels and build them up over time in addition to your retirement savings.
• Level One emergency savings are for unexpected things such as your car breaking down or your air conditioning going out.
• Level Two emergency savings are for life-changing events such as the loss of a job or major health issue.
• If you keep all funds in one account, you will be more tempted to use the money for something else because you are more likely to view it as one big pile of money with no specific purpose.
• Having separate accounts for each type of savings is a mental trick to help reinforce the purpose of the funds. For example, the more you view your Level One emergency savings account as money to pay unexpected bills, the less you are likely to use the funds to go out to dinner.
• Start small and build up to the recommended levels. For example, if you feel you cannot save 10 percent of your gross income towards retirement today, then start with 5 percent or whatever works. The key is to get started.
• Get in the habit of paying yourself first sooner rather than later because this habit sets the foundation for everything else in your financial life.

Benefits

• Paying yourself first means the money comes out of your income as soon as you receive it so it’s no longer available for other things.
• There is no waiting until the end of the month to see what is left over to put towards savings, which does not work, because there will never be anything left over. Yyou will always find a reason to spend your money on something.
• It is psychologically rewarding to know each time you receive income, that you have immediately done something with it to help secure your future.
• The rest of the money you have left over after paying yourself first and paying all your other bills can be used without guilt or worry because you know you have taken care of the important things.