What Does It Mean to Pay Yourself First?
“Pay yourself first” means that every time you get paid, you put money into savings before you take care of monthly bills or any discretionary spending. This budgeting strategy allows you to save for future financial goals, such as retirement or a new home, and have emergency funds for unexpected expenses.
Key Things to Know About Pay-Yourself-First Budgeting
- It prioritizes saving money over living expenses.
- It does not require you to categorize expenses or keep a detailed log of all your spending.
- Setting up automatic transfers from your checking account to your savings can make paying yourself first easier.
- The pay-yourself-first strategy is also referred to as reverse budgeting since you build your budget around your savings goals instead of focusing on your monthly bills and spending.
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How to Pay Yourself First
To successfully follow the pay-yourself-first budgeting strategy, you need to figure out how much you can afford to pay yourself, create savings goals, and regularly review your progress toward your goals. Following the steps below can help you set up and adhere to your pay-yourself-first budget.
1. Figure out how much to pay yourself.
Look at your monthly expenses to see what you typically spend in a month. You can review past bank and credit card statements to get a good idea of how much you need to cover your bills and other spending you do in a given month. Once you have figured out how much you need to cover your living expenses, see how much you can realistically save every month without overextending your finances.
2. Create savings goals.
Figure out what you want to save for. This could be anything, but remember that building an emergency fund and saving for retirement should take priority over things like vacations or buying a new car. Prioritizing an emergency fund can ensure you have money available to cover unexpected expenses or to survive in the event that you lose your job. Putting funds into your retirement account helps ensure you have financial security when you stop working.
Once you have a list of your savings goals, split the funds you plan to put aside every paycheck among these goals. For example, if you plan to save $200 of your paycheck every month, you could split up the funds like this:
- $50 into an emergency fund
- $100 into a retirement account
- $50 saved for your next vacation
3. Review your progress and make necessary adjustments.
Even if you feel like you are putting away a good chunk of your paycheck every month, you should still review your savings and retirement accounts regularly. Reviewing your accounts every so often allows you to check whether you are on track to meet your future financial goals, whether that’s having enough funds to cover retiring at age 65 or being able to put 20% down on a home in 5 years, for example.
If you see that you’re not on track to meet your goals because you have high living expenses, there are things you can do to help.
Tips for Meeting Your Savings Goals
- Start small by setting aside as little as $5 or $10 per paycheck.
- Check where you can cut down on discretionary spending.
- Increase the amount you put aside each paycheck as you cut spending.
- Create incentives to encourage you to stick to your plan.
Pay-Yourself-First Budget Pros and Cons
The biggest advantage of the pay-yourself-first budget is that it prioritizes saving, while the biggest downside is that it doesn’t focus on tracking your expenses. If you have trouble paying your monthly bills, using a strategy that doesn’t prioritize listing out your expenses won’t help you identify areas where you can cut spending.
Pros and Cons of Pay-Yourself-First Budgeting
| Pros | Cons |
| Prioritizes saving | Doesn’t focus on tracking expenses |
| Simple to implement | No plan for paying back debt |
| Helps you build an emergency fund | Less money for fun now |
| Offers flexibility | Info |
Pros
Prioritizes saving. Putting money into your savings every time you get paid reduces the chance you will spend the money before you stash it away.
Simple to implement. There is no complicated math involved with the pay-yourself-first method. You can even have your savings on autopilot if you set it up so that funds automatically transfer from your checking to your savings account every time you get paid. You also won’t have to spend time listing and categorizing your expenses, like with some other budgeting methods.
Helps you build an emergency fund. Setting aside some money now allows you to have funds available for an unexpected expense, such as an expensive car repair or medical bill, without impacting your other monthly expenses. Having an emergency fund also ensures you have money to take care of your living expenses if you lose your job.
Offers flexibility. There’s no set amount or percentage that you will need to put aside every paycheck. You can save as little or as much as you want.
Cons
Doesn’t focus on tracking expenses. The pay-yourself-first budget doesn’t require you to list or categorize expenses, which can make it difficult to know where to cut back on spending if you need to. If you are not tracking your expenses, you won’t know exactly where your money is going or how much you’re spending.
No plan for paying back debt. While it’s important to have long-term savings goals, it shouldn’t be at the expense of paying down debt. Debt can eat away at your savings and it can also bring down your credit score. Instead of the pay-yourself-first method, someone with a lot of debt would benefit more from a strategy that allocates funds specifically for paying back debt, such as the 70/20/10 budget rule.
Less money for fun now. Since you are focusing on saving money, you may not have as much left over for discretionary expenses. However, that may not always be a bad thing, especially if you are trying to save for larger items, such as a new car or the freedom to retire. Just focus on what saving now buys you in the future.
Pay-Yourself-First Budget Tips
Automate your savings.
If you set up your checking account to automatically transfer funds to your savings, retirement, or investment accounts every time you get paid, it will be one less thing you will have to remember to do. It can also prevent you from spending the money before you have the chance to save it.
Allocate money from your direct deposit.
Depending on your employer, you may be able to split up your direct deposit to have a certain amount or a percentage of your paycheck go directly into your savings account and the rest go into your checking.
Use budgeting tools.
Use budgeting tools like the ones available on WalletHub to track how much you are spending and saving over time. You can also sync your financial accounts so your budget updates automatically and you can get transaction alerts.
Consider financial status changes.
If you get a pay raise, increase how much you put into savings each paycheck. You may also want to consider setting aside a portion of your annual bonus to give your savings a boost.
If your pay decreases, review your monthly expenses and see if there are any areas where you can cut spending. If there is nowhere you can reduce spending, you may want to consider decreasing how much money you put into savings until your pay increases again.
You can learn more from our complete list of the best budgeting tips.
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