Paying yourself first | Budgeting and saving | Financial Literacy | Khan Academy

You might have heard the term "paying yourself first," and this just means putting your safety, your needs, especially your future needs, first before you think about other things.

So let's give ourselves an example. Let's say that you want to buy a laptop that is $624, and you currently do not have the $624 to buy that laptop. That laptop will help you with your work; maybe it'll help you with school or can help your family in some way. It can also provide other benefits that you want, so you want your future self to have this laptop, and you say, "I want this laptop over the course of the next year."

The paying yourself first philosophy would say, "All right, every paycheck, how much do I have to put aside first before I do anything else to make sure that I'm gonna get my hands on this laptop?"

So let's have an example. Let's say that I'm paid weekly. If we are paid weekly, how much do we have to put aside for every paycheck in order to, at the end of the year, have $624 saved up for the laptop? Well, if we're thinking weekly, we have to save that $624 over the number of weeks in a year. So we're going to divide that by 52 weeks. You could do that by hand, or you could punch that into a calculator, and you're going to see that you're going to have to save $12 per week, which doesn't feel like a lot.

So what you would do is, every time you get that paycheck, before you even think about anything else, you would take that $12 and transfer it, maybe into a savings account— that's kind of your laptop savings fund.

What if you, instead of getting paid weekly, are paid bi-weekly? That means you're getting paid every other week or every two weeks. Well, then you're going to have to save twice as much since it's not covering just one week of savings; it's two weeks of savings. So in that situation, it's going to be $24 for every two weeks.

What if you are being paid semi-monthly? You might think that these are similar; if you're paid every other week or if you're paid semi-monthly, which means you're paid twice a month, but months don't have exactly four weeks— at least most months don't have exactly four weeks.

The way that you would calculate for semi-monthly is you say, "All right, there's 12 months in a year, so there's 24 semi-months in a year." Thus, it would be $624 divided by those 24 semi-months, I guess you could call them, and then that would get you $26—$26 per semi-month.

And then last but not least, if you're paid monthly (and I'll do that in a different color for kicks), if you're paid monthly, then you're going to take that $624 and divide it by the 12 months. You would want to set aside $52—$52 per month.

So this video gave us a little bit of practice thinking about our paychecks, whether we're getting paid weekly, bi-weekly, semi-monthly, or monthly. But it's really thinking about, "Hey, you have a pretty big goal over here." If you divide it by the number of paychecks that you're getting in a year, you can then think about how much you have to set aside, paying yourself first every paycheck, so that it will add up over the course of a year— whatever time period you're thinking about— so that you can get and reach your goal.