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A Pay-Yourself-First Budget is a Simple Way to Amp Up Your Savings

  • Paying yourself first means saving money before using it for bills and other spending.
  • This approach to budgeting protects against financial emergencies and provides for future opportunities.
  • Automatic transfers from your paycheck to dedicated accounts for saving are an easy way to make paying yourself first work.
A photo of a man writing on a notepad with cash in his hand and a jar full of cash on the table in front of him.
Saving at least 20% of your income is a target that many financial planners recommend. 
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When it comes to your money, earning it is only half the battle. Once you’ve got a balance in your bank account, putting a plan in place to manage, save, and invest it is crucial to your long-term financial well-being.

Developing a budget doesn’t have to be difficult. One of the most popular methods for doing so is built around a simple principle: pay yourself first.

“Most people spend their money, and then say ‘Oh, I need to save.’ Then at the end of the month, they just forget and they never really save,” says Erik Sussman, a certified financial planner and CEO of The Institute of Financial Wellness. “So instead, we implement pay yourself first. That means before you pay the light bill, before you pay your mortgage, before you pay for your clothing, you pay yourself first.”

How pay yourself first budgeting works

At its core, the pay-yourself-first method just means having a specific amount of your paycheck set aside and saved every month before spending on anything else.

“In essence, it’s automating a saving strategy, or putting a plan specifically around savings,” explains Autumn Lax, CFP at Drucker Wealth Management.

Often described as “reverse budgeting,” paying yourself first ensures that saving is not only accounted for early and reliably but that it becomes a priority. Your savings turn into a monthly expense — paid to you, by you — that you “owe” every month or every paycheck. To find the ideal amount, financial planners recommend taking the following steps.

1. Determine your monthly income and expenses

“First thing you’ve got to do is write out a game plan,” Sussman explains.

Paying yourself first doesn’t mean you neglect all of your other financial responsibilities in pursuit of your savings goals, so you’ve still got to account for them. Lax suggests reviewing your spending over the past few months, itemizing it, and figuring out your average spending by category.

It can help to start with your recurring and required expenses — for example, rent or mortgage, food, minimum loan payments, medicine, and bills. Once you calculate that minimum amount you know you’ll have to spend every month, you’ll be better equipped to determine how much you can afford to save.

2. Decide how much you want to save (pay yourself)

In an ideal situation, you should aim to save 20% or more of your income, and 10% at a minimum, Sussman says.

So let’s say you bring home $3,000 per month. A good monthly savings target would be $600, or 20%. If you’ve calculated your minimum monthly expenses to total $1,400, for example, saving $600 per month is more than doable. It even leaves an additional $1,000 to spend freely or put toward other goals like paying down a mortgage.

However, with these numbers, you could just as easily decide you’ll save $1,000 per month and put the $600 toward your discretionary spending. Ultimately, finding that sweet spot is going to be unique to each person based on their lifestyle, income, expenses, and goals. As a general rule, aim for 20% and adjust from there. If 20% isn’t achievable, it may be worth looking into ways you can minimize your spending or increase your income.

3. Determine where your pay-yourself-first money is going

Once you know how much you’re going to pay yourself each month, it’s time to figure out where that money should actually be going.

“If you have no emergency cash reserve, I see that as a priority,” Lax says. “The next place I would look to save is in tax-efficient vehicles like retirement plans.”

Another way to look at your savings is by timeline.

“Break up your goals into short-, mid-, and long-term,” says Sussman. The Short-term could be an emergency fund if you don’t have one. Mid-term might be purchasing a house. The long-term could be retirement. “You need to portion out how much to put in each of those buckets,” he explains. After determining how much you’re saving every month, then delineate how those savings are specifically divided.

4. Create a saving strategy

With all the numbers figured out, put your plan into action. One of the easiest ways to “pay yourself” every month is to automate the transfer from your checking account to the appropriate savings vehicle.

“If you just automate it, it happens without having to think about it,” Lax says.

Not only does it make saving self-regulating, but it also removes the money from your checking account before you can consider spending it. Some employers make it easy to deposit percentages of your check into different accounts. If that isn’t possible, you can usually set up these transfers through your bank.

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