What does the phrase "pay yourself first" refer to in financial planning?

The phrase "pay yourself first" in financial planning emphasizes the importance of prioritizing savings and investments before addressing other financial obligations. This approach encourages individuals to allocate a portion of their income to savings or investment accounts as soon as they receive a paycheck. By doing so, they ensure that they are building their financial future and contributing to their own long-term goals, such as retirement or emergency funds.

When someone pays themselves first, they treat their savings like a non-negotiable expense, which can help instill discipline and promote better financial habits over time. This strategy can lead to accumulating wealth more effectively, as it encourages individuals to track their expenses around the savings they have already set aside, rather than waiting until all other bills and expenses are paid, which can often leave little to nothing for savings.

The other options do not align with the concept of paying yourself first. Spending freely after receiving a paycheck typically leads to a lack of savings and financial instability. Making all expenses the top priority ignores the necessity of saving, and donating a portion of income immediately, while generous, does not incorporate the fundamental principle of ensuring that one’s financial health is secured before contributing to other causes. Thus, focusing on savings upfront is essential for effective financial planning.