Here’s how most people approach saving money:
They tell themselves that they’ll save whatever is left at the end of the month. But someone there never seems to be anything left when the end of the month rolls around.
I was stuck in this pattern for years, and I know how frustrating it can be.
I finally learned the “pay yourself first” strategy, which has completely changed the way I budget and has helped me to save money consistently each month.
In this article, I’m sharing how you can pay yourself first to pay off debt, build your emergency fund, and save for your biggest financial goals.
What does it mean to pay yourself first?
The concept of paying yourself first means that you set aside money in your budget for savings and financial goals before budgeting for anything else. You treat your savings just as you would any other bill, meaning its non-negotiable.
The entire purpose of the “pay yourself first” strategy is to avoid the problem I talked about earlier, where you run out of money each month before you have a chance to save any.
When you pay yourself first, you transfer money out of your checking account as soon as you get paid each month before spending any. Then, you can only spend what’s left.
Paying yourself first is an effective way to build your emergency fund or save for a financial goal. You can also use it to pay off debt by making extra debt payments as soon as you get paid.
How to pay yourself first
Follow these steps to implement pay yourself first in your own budget.
STEP 1: CALCULATE YOUR INCOME AND EXPENSES
First things first, write down your monthly income and expenses.
If you’re a salaried employee, calculating your monthly income will be easy. If you have an irregular income because you’re self-employed or are an hourly or tipped employee, this will take a little more work. I recommend checking what your income has been for the past 3-6 months and taking the average amount.
It should also be easy to figure out your fixed monthly expenses. These are the non-negotiable expenses you have to pay each month, like rent, insurance, and your student loan payment.
Once you’ve calculated your fixed expenses, try to determine how much you spend on other expenses throughout the month. Your variable expenses will include things like groceries, dining out, transportation, clothing, etc. Your discretionary spending may change each month, but you can probably look back a few months and find the average.
Read More: Creating a Monthly Budget: A Step-by-Step Guide
STEP 2: SET FINANCIAL GOALS FOR YOURSELF
One of the most important steps in paying yourself first (at least in my opinion) is setting financial goals.
It’s easy to tell yourself that you’ll save money. But unless you really have a why behind your savings, it can be hard to stick with it. If you set a specific goal, you’ll have something to motivate you to follow through.
Savings goals you might save for include:
- Building your emergency fund
- Start saving for retirement
- Saving for a new car
- Saving for the downpayment on a home
- Saving for a vacation
- Renovate your home
- Start a business
- Reach financial independence
You may have some short-term goals that you can reach in just a few months. On the other hand, some of your goals may be long-term goals that you won’t reach for several years. The method of paying yourself first can work for either type of goal.
Read More: How to Set Financial Goals You Can Achieve
STEP 3: DECIDE HOW MUCH YOU WANT TO SAVE EACH MONTH
Once you’ve calculated your income and expenses and figured out what you want to save for, decide how much you’ll save each month. You want to make sure you’re saving enough to make a real difference but not so much that you don’t have enough money for your monthly spending.
An easy way to figure out how much to save is to divide the amount you want to save by the number of months before you want to have it saved.
Let’s say you’re planning a vacation next summer, and you expect to spend around $2,000. If the trip is 12 months away, just divide $2,000 by 12. You’ll find that you need to save roughly $167 per month for the next year.
Of course, the amount you can pay yourself is also limited by your income. While you might love to buy a house next year, if it requires that you save $5,000 per month and you don’t earn that much, that financial goal may simply not be a reality.
And in the case that you have multiple financial goals you’re saving for, as many of us do, then you’ll have to decide how you can either prioritize one goal or split your savings between the two. For example, I have the goal of financial independence that I’m always saving for, but I simultaneously save for other smaller financial goals at the same time.
If you’re new to paying yourself first, you might worry about overspending and running out of money. If you’re just getting started, begin with a small automatic transfer.
When I first started using this strategy, I did an automatic transfer of $50 the first week of the month. As I adjusted to my new spending limitations, I increased my monthly savings.
STEP 4: AUTOMATE IT
A great way to ensure you pay yourself first every month is to automate it. Set up an automatic transfer to go through a day or two after payday each month. That way, you’re saving regularly, and you don’t have to think about it.
I can almost guarantee that if you don’t automatic it, you’ll often come up with an excuse for why you can’t save as much this month.
And if you’re using the pay yourself first method to pay off debt, just set up an automatic payment each month for the amount you want to pay.
The goal you’re working toward will determine where the automatic transfer is going. Depending on the goal, you might have your automatic transfer going to a savings account, a retirement fund, a taxable brokerage account, a debt account, or something else.
Read More: 6 Easy Ways to Automate Your Finances
As a quick tip, some employers allow you to set up your direct deposit so you can split your paycheck between multiple accounts. This strategy can be particularly useful in helping direct money to your savings account.
Benefits of paying yourself first
Paying yourself first is one of the best strategies to help you build your savings or pay off debt every month.
Many individuals and families struggle to make progress on their savings. The most recent data shows that only about 39% of Americans would be able to cover a $1,000 emergency.
Not only can paying yourself first help to prepare you for a financial emergency, but it can also help you make progress on your financial goals.
The pay-yourself-first method is especially well-suited for people who struggle with spending. Think of it as a reverse budget. Rather than having to stick to your spending plan to save, you’ll be limited to spending what’s left after saving.
I know how frustrating it can feel to be so determined to save, and yet you somehow never manage to. Paying yourself first is one of the best ways to reach your financial goals, even if you’ve struggled to do so in the past. Trust me – your future self will thank you.