Wise Bread Picks
Every book on personal finance says that you should pay yourself first--get the money out of your checking account and you won't even know it's missing. There's a lot of truth to that, but the pay-yourself-first model has some downsides, as well. I found that paying myself last actually worked better.
Just to be clear, I actually did both: my 401(k) money came out before I got my paycheck, and that money made up the bulk of my savings when I was working a regular job.
In addition to that money, though, I was also saving some after-tax money, with an eye toward retiring before I was old enough to take money out of a tax-sheltered account. Over the years I tried various ways of getting that money into savings, but nothing worked as well for me as just waiting until the bills were paid, and then transferring what was left into my ING Direct account.
Regular savings
I tried putting a specific amount into savings each paycheck, and I tried putting a specific amount into savings each month. Both of those plans fell short, simply because of variations in the amount of money I spent each month. What with car insurance, renter's insurance, tax payments, my annual fitness center membership, car maintenance, shoes, coats, clothes, vet bills, and vacations, we simply didn't have very many months in the year when our expenses were average.
Unless the regular savings deposits were so small that money accumulated in the checking account (which is just what pay-yourself-first is supposed to avoid), we ended up having to raid our savings account to pay ordinary bills like the car insurance--and taking money out of savings as often as we were putting it in seemed to defeat the purpose.
I tried having two savings accounts--one where we put aside money specifically for expenses like insurance and vacations, and another where we put our long-term savings, but that was a whole additional layer of complexity that didn't seem to add much value.
Irregular savings
In the end, what worked best for us was just what the personal finance orthodoxy says is bad: we paid ourselves last. Each month, after we paid the bills, we looked ahead to see what expenses were coming up (we knew what we'd charged on our credit cards, and we knew which of the annual bills were coming) and we figured out how much money we needed to keep in the account to pay the foreseeable bills. Then, we transferred the rest to savings.
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I think this worked for us because we got a lot of satisfaction out of putting the money aside. For us, it was literally more fun to save the money than it would have been to spend it.
We were pretty aggressive in saving money--aggressive enough that occasionally we had to take money back out of savings to pay a bill that came earlier than expected or turned out to be larger than expected. But that didn't happen so often that taking money out of savings turned into a regular thing.
One downside: irregular investing
Even though having the money in our checking account didn't result in us just spending the money, there was a downside to paying ourselves last--we ended up saving plenty, but not getting it invested as regularly as we should have.
Our 401(k) money got invested every two weeks, letting the dollar-cost-averaging thing work to our advantage. There's no reason that we couldn't have gotten our after-tax savings invested as well (and when I had a clear idea of how I wanted to invest it, I did), but for long stretches, especially when the market seemed a little high, I ended up just leaving our savings in cash. We'd have been ahead of where we are now, if I'd done a better job of getting that money invested regularly.
First, last, or middle: pay yourself
Unless you're like us--unless you get a big jolt of satisfaction out of doing that transfer to savings--you'll probably come out ahead by paying yourself first, just like the personal finance books say to do. But don't hesitate to give pay-yourself-last a try, if it seems like it might work better for you.
The only wrong way to put money in savings is not doing it.
