What it Means to Pay Yourself First & Why You Should

What Does it Mean to Pay Yourself First?

Paying yourself first means that your budget is built around savings goals instead of mandatory and discretionary spending. In this form of reverse budgeting, a portion of your paycheck is routed to a savings goal, like an IRA or paying off a credit card.

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What’s important about reverse budgeting is that you truly do pay yourself first before you think about how much money to set aside for bills. Because this money move happens first, you’ve paid into your savings—like an IRA, life insurance, health savings account, emergency fund, or paying off debts—before you’ve even considered using the rest of your paycheck for expenses or created the rest of your budget.

Why Does Paying Yourself First Work?

If managing money isn’t your strong suit, and you find yourself living paycheck to paycheck, even though you have a steady salary and manageable expenses, paying yourself first might be a great way to keep your spending in check and build up some savings.

Paying yourself first means that a portion of your income is automatically routed to savings. If you’re the type of person who spends money as soon as you get it, this can help you focus on the big picture and reduce impulsive spending. Paying yourself first works because it forces you to cut back on discretionary spending when you have a more limited amount. It keeps the money from burning a hole in your pocket.

Automation is a great way to pay yourself first. Route a portion of your paycheck into savings, and have the rest go into your bank account as it normally would. This lack of interaction can cause you to adjust your spending on what money is readily available. Another tip is to have your savings be in an account that isn’t linked to your main bank account; it won’t be visible when you check your balance and won’t act as a temptation.

How Does Pay Yourself Budgeting Work?

Reverse budgeting is a hands-off approach to savings but setting it up for the first time requires some planning and understanding.

• Take a good look at your spending. Before you determine how much to set aside, you must first understand where your money is going, and how much you’re spending unnecessarily. You may need to look at bank and credit card statements from prior months.
• Determine how much to pay yourself. If you’re just getting started, try to stay realistic. If you’re only bringing home $2,000 a month and you have rent, bills, and a car payment, you won’t be able to put half your money aside. The 50/30/20 approach is a good place to start. You allocated 20% of your income to savings, 50% to necessities, and 30% to wants. Using that same $2,000 per month income, you’d save $400 for the future.
• Understand your savings goals. Consider what your ultimate goals are. Are you trying to create an emergency account or pay off some credit card debt? If you’re trying to max out an IRA, you might save differently than if you’re trying to budget for a big vacation or buying your first home. By understanding your savings goals, you can get a better idea of how to save, and how much to save.
• Adjust. If you find that the 50/30/20 method has you coming up short every month, adjust your spending or saving to find a balance that works for you. This might mean that you spend more time focusing on a savings goal and cutting back on unnecessary expenses. It may take some trial and error to find a balance that works for you. Adjust your savings as necessary.

Paying yourself first is a great option if you have trouble saving money and prefer a hands-off approach to saving. Automating your savings can make this approach to reverse budgeting even more streamlined. By being proactive, you can eliminate unnecessary spending and reach your savings goals.