Money Management

What Does It Mean to Pay Yourself First?

By  Danielle Miura

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Many people get accustomed to paying for their needs and wants, then saving is last on the totem pole. But what if you decide to save your money first, before paying your bills? Paying yourself is what it sounds like: fund your savings goals first and then utilize the rest of your monthly income towards anything you like. 

What Does It Mean to Pay Yourself First?

“Paying yourself” means setting aside a portion of your income, before spending money on everything else. The purpose of the “paying yourself first” strategy is to avoid the problem of not having enough money to save each month after you pay off your bills. Once the pay yourself first strategy is implemented, the process should turn into a repetitive motion that feels like a monthly bill due every month. When you pay yourself first, you are investing in your future self.

Paying yourself can include:

  • Putting money into your employer’s retirement account
  • Contributing to an HSA or FSA
  • Creating an emergency fund
  • Saving for a downpayment on a house

The pay yourself first budgeting method may also be called reverse budgeting, which is also based on the idea of prioritizing your retirement and savings goals.

Why Is It Important to Pay Yourself First?

Your expenses break down into two main categories:

  • Nondiscretionary Expenses: These are bills that are essential for your well-being, such as rent, food, and electricity. 
  • Discretionary Expenses: These are variable expenses that are not mandatory, such as travel, eating out, subscription memberships, and entertainment. 

When you wait to save your money at the end of the month, you will most likely end up putting your savings in the second category. If you save money after paying your bills, it is easy to have nothing leftover. 

However, if you save a portion of your money first, your savings will become mandatory. By paying yourself first you are making a conscious effort to make your long-term well-being a priority. Therefore, you are more likely to reach your goals and stick with the process when you can visualize your progress.  

Reasons to Pay Yourself First

  • Teaches you how to prioritize your savings: Paying yourself first helps to change your mindset when utilizing your money.
  • Builds your emergency fund: When you establish an emergency fund for unexpected expenses, you will feel less stress paying for it. 
  • Establishing a savings and investment schedule: By automatically contributing to your retirement savings accounts, you will be better prepared when you are ready to retire. Implementing dollar-cost averaging can help you consistently contribute to the stock market.
  • Help you view money differently: When you start seeing your progress, it will help encourage you to continue. You will feel more comfortable in your ability to control your money, instead of your money controlling you. 

How Do You Pay Yourself First?

Evaluate Your Monthly Income and Expenses

Review your spending over the last couple of months and determine your average spending habits per category. Start by reviewing your bank and credit card statements to dictate your recurring and required expenses. These expenses can include rent, food, debt payments, and bills. Once your budget is calculated, you will have a better idea of how much money you have left over to save. 

List Your Savings Goals

Now is the time to decide what you want to accomplish with the money you will be saving. For example, if you have $200 leftover each month, where do you want to allocate that money? Specifically, think about your motivation for making these savings goals. Why do you want to save money in the first place?

If you are unsure where to start, try the 50/30/20 budgeting strategy:

  • 50% of your income goes towards essential expenses like housing, utilities, and food.
  • 30% of your income goes towards expenses you want, such as entertainment or leisure costs.
  • 20% of your income goes towards saving or paying off debt payments.

Set Up Automatic Transfers

Once you have a list of your savings goals, it is time to automate your savings. This way, your money will be directly transferred to your savings account without the temptation of spending money you should be saving.

Here are the ways to accomplish this task:

  • Have your employer do it: Talk to your payroll or human resource department to begin contributing a fixed amount or a percentage of each paycheck to your employer’s retirement plan. Your employer may also be able to make a direct deposit into more than one bank account.
  • Have your bank do it: Contact your bank representative to set up an automatic transfer from your checking to your savings account.
  • Have your brokerage firm do it: Talk to your brokerage firm about setting up a monthly automatic transfer into your investment or retirement accounts.

Think of this money like your taxes, it’s not part of your take-home pay because it gets taken out of your income before it reaches your wallet.

Make Adjustments as Needed

Life is unpredictable, be willing to adjust your savings plan when needed. If you find that this savings plan that you have adopted doesn’t work for you, you can always tweak it to meet your budget needs. If you are having difficulty sticking to your budget, try trimming your discretionary expenses or getting a side hustle for extra income.

What Are the Benefits and Disadvantages of Paying Yourself First?

Just like any decision, evaluate the pros and cons of paying yourself first budgeting method before starting. 

Advantages of the Pay Yourself First Budgeting Method

The primary benefit of setting your savings aside first is to build up your savings over time. This strategy forces you to prioritize saving and living within your means. 

Here are a few other potential advantages of the pay yourself first method: 

  • Paying yourself first budgeting model is less complex compared to other budgeting methods, such as the zero-based budgeting method. As long as you are not spending more than you should each month, it doesn’t require you to have a detailed budgeting plan. 
  • When people save their money first, they tend to be careful with the remainder of the money and use it on things they need or value. 
  • Automating your savings is easy to set up. Most banks and employers can set it up for you.
  • Contributing your savings to accounts that earn compound interest can help your money grow as long as you leave it untouched.

Disadvantages of the Pay Yourself First Budgeting Method

Unfortunately, this budgeting strategy doesn’t work for everyone. Before deciding to implement this strategy, consider how it fits into your personal finances. 

  • If you are not careful with how much you are saving, you may find yourself scraping for money at the end of the month. You can prevent this by using a budgeting calculator to determine how much you can reasonably save each month.

The Bottom Line

Paying yourself first is a savings strategy focusing on prioritizing your savings over your expenses. Whether you are saving for a downpayment, a vacation, or an emergency fund, paying yourself first is one of the easiest ways to ensure that you can meet your short-term and long-term goals. 

This article reflects the insights and opinions of its author and is not a recommendation or endorsement of their views or services.

Danielle Miura

About the Author

Danielle Miura, CFP®

Danielle Miura is a Fee-Only, Advice-Only Certified Financial Planner and Sandwich Generation Specialist. She is the founder of Spark Financials, a life and financial planning firm specializing in helping Sandwich Generation families. As a CERTIFIED FINANCIAL PLANNER™ professional, she specializes in comprehensive financial plan development, financial education, and financial research.

Disclaimer: To make Wealthtender free for our readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a natural conflict of interest when we favor their promotion over others. Wealthtender is not a client of these financial services providers. Learn how we operate with integrity to earn your trust.