Why “Paying Yourself First” Should Include Your Retirement Accounts

The concept of “paying yourself first” is one we’ve discussed here before, so it’s likely one you’re quite familiar with. If not, the idea of paying yourself first means that you treat your savings contributions as you would any other bill or financial obligation. In other words, rather than waiting to see what you have left at the end of the month before deciding what you’re able to save, your saving becomes a financial obligation that you fulfill along with your other obligations.

Part of paying yourself first should include contributions to your retirement accounts. This is true regardless of your income level, and regardless of how much you’ve already saved for retirement.

Here is some retirement advice on the most important reasons why you should pay yourself first:

This means that every individual is limited in how much they can contribute to their account each year, regardless of whether they have more funds available to save. For contributions to IRAs in 2014, for example, the annual limit is $5,500 (or $6,500 for individuals age 50 or older) across all accounts.

These annual contribution limits are “use it or lose it” in the sense that if you fail to maximize your contribution in any given year, you won’t have the opportunity to go back next year (or in any subsequent year) in order to contribute more. If you don’t pay yourself first with contributions to these accounts, you may be less likely to maximize your contributions each year.

By making those contributions into your retirement accounts, you will effectively be denying yourself the opportunity to spend that money impulsively or rationally. Making early withdrawals from retirement accounts will trigger penalties and (depending on the type of account) potentially a higher tax bill, which provides a strong disincentive to using the contributed funds for other purposes.

The habits we create for ourselves can be good ones or bad ones. Paying yourself first, and being sure to include contributions to your retirement accounts as part of those payments, is one of the best habits you can create.