What does "Pay Yourself First" mean?

Study for the FDIC AIDT Ready-To-Work (RTW) Money Smart Exam. Practice with multiple-choice questions, each with hints and explanations. Prepare for your assessment!

"Pay Yourself First" refers to the financial strategy of prioritizing savings before any other expenses, including bills or discretionary spending. This approach emphasizes the importance of setting aside a portion of your income for savings or investments right off the bat, ensuring that you are building your financial security before allocating money to other expenditures.

By consistently putting money into savings first, individuals can cultivate a habit of saving and gradually build a financial cushion, which can lead to long-term stability and the ability to meet future goals. This method often prevents the scenario where individuals spend their income on various expenses and have little to nothing left for savings at the end of the month.

In contrast, focusing on paying bills first may leave individuals with minimal funds for savings after all necessary expenses have been covered. Setting aside money for entertainment suggests a prioritization of wants over needs, while investing in stocks without first ensuring a solid savings base could introduce significant risk without a safety net. The core premise of "Pay Yourself First" is about building a robust financial habit and ensuring savings are a non-negotiable part of financial planning.

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