What Does It Mean to Pay Yourself First?

The "pay yourself first" method is a strategy that prioritizes saving and investing before addressing other expenses. Instead of saving whatever is left over at the end of the month, this method ensures that you are consistently building wealth by treating savings like a non-negotiable expense. 

This budgeting approach is particularly effective because it makes savings automatic and reduces the temptation to overspend. Many people struggle to save regularly because they wait until the end of the month to see what’s left over. The "pay yourself first" strategy may help savers create a disciplined habit that can significantly improve their financial health over time.

What Does “Pay Yourself First” Mean?

The "pay yourself first" strategy is all about making savings a top priority. Typically, when people receive their paycheck, they first cover their rent, utilities, groceries, and other expenses. However, with this strategy, the first action taken is setting aside a portion of income for savings or investment accounts, such as retirement funds, emergency savings, or other long-term financial goals.

This approach forces savers to live on what's left after saving. It’s a straightforward method to grow savings and build wealth over time, even if you start small.

How To Implement The “Pay Yourself First” Strategy

If the "pay yourself first" strategy sounds appealing, here are the steps to get started.

Steps to Start Paying Yourself First

1. Set clear goals: Determine your savings goals. Are you saving for an emergency fund, a down payment on a house, or retirement? Knowing your target will help you figure out how much to set aside each month.
2. Determine a savings percentage: Ideally, aim to save at least 10% to 20% of your income (the exact percentage will depend on your financial situation and goals). Start with what you can afford and gradually increase it over time.
3. Automate your savings: One of the most effective ways to pay yourself first is by automating the process. Set up automatic transfers from your checking account to a savings or investment account. That way, you don't have to remember to do it each month.
4. Adjust your budget: After allocating your savings, adjust your budget to live off the remaining income. This ensures that you're covering necessities such as rent, utilities, and food, but still be mindful of discretionary spending.
5. Track your progress: Regularly monitor your savings to ensure you're on track toward your goals. If possible, try to increase the percentage you're saving over time.

Tips for Keeping It Consistent

• Start small: If saving a large percentage seems daunting, start with a smaller amount and gradually increase it as your financial situation improves.
• Make it non-negotiable: Treat savings like a fixed expense. Once you’ve set aside money for savings, don’t touch it unless it’s for an emergency.
• Review your progress annually: At least once a year, evaluate how much you’ve saved and consider adjusting your contributions if your income has increased or your goals have changed.

Comparing The “Pay Yourself First” Method To Other Budgeting Techniques

The "pay yourself first" method is one of many budgeting strategies designed to help individuals manage their finances. Another popular method is the 50/30/20 rule, which breaks down your budget into three categories:

• 50% for necessities (e.g., rent, utilities, groceries)
• 30% for wants (e.g., entertainment, dining out)
• 20% for savings and debt repayment

In comparison, "pay yourself first" puts savings at the forefront, while the 50/30/20 rule treats savings as a fixed percentage of your income. While both methods can be effective, the key difference is mindset. "Pay yourself first" is more aggressive about prioritizing savings, ensuring that it’s the first expense rather than the last.

Another common budgeting approach is the zero-based budget method. With this method, every dollar is assigned a purpose, including savings, expenses, and debt repayment. As with “pay yourself first,” this method emphasizes intentionality with your money. However, it requires a more detailed tracking of expenses.

The Pros and Cons of Paying Yourself First

Every method of saving has its upsides and downsides. Here are some to consider:

Pros

• Financial security: By prioritizing savings, you build a financial safety net that can cover emergencies and reduce reliance on credit cards or loans.
• Automatic savings growth: When you save first, your savings can grow consistently over time, especially when you invest in accounts with compound interest.
• Reduces overspending: Paying yourself first limits the amount leftover for discretionary spending, making it easier to avoid lifestyle inflation or impulse purchases.
• Improved financial discipline: Over time, this method builds financial discipline, encouraging consistent savings and helping you focus on long-term financial goals.

Cons

• Can feel restrictive: If you're already living paycheck to paycheck, it may feel overwhelming to set aside money for savings before covering expenses.
• Requires consistent income: If your income fluctuates, it can be harder to commit to a specific savings amount each month. You may need to adjust your savings rate accordingly.
• May lead to skimping on necessities: For those with tight budgets, paying yourself first may mean cutting back too much on essential expenses, which can lead to stress.

How To Make “Pay Yourself First” Work with Different Income Levels

The "pay yourself first" method can be adapted for individuals at different income levels. Here’s how it might work in various situations:

• Lower income: If you're on a tight budget, start with small savings contributions, such as 5% of your income. Over time, look for areas to cut back (such as dining out or subscriptions) to gradually increase your savings rate.
• Middle income: If you have more flexibility in the budget, aim to save at least 10% to 15% of your income. Consider automating contributions to retirement accounts, as well as a separate savings account for emergencies.
• Higher income: For those with a higher income, saving 20% or more of your income is feasible. Max out contributions to tax-advantaged accounts such as 401(k)s and IRAs, and allocate funds for both short-term and long-term goals, such as travel or early retirement.

In all cases, the key to success is consistency. Even if you start with a small amount, regular savings will compound and grow over time.

The Bottom Line

The "pay yourself first" strategy is a powerful and straightforward way to build financial security. Whether you're saving for retirement, an emergency fund, or future investments, this method may help you build wealth and financial discipline over time.