Pay Yourself First: What It Means & How To Do It


Paying yourself first means prioritizing savings over spending in your budget. It can help you reach your financial goals and build positive financial habits.

Many people prioritize savings and financial goals last in their monthly budgets. In other words, they spend money throughout the month and wait to see what’s left at the end to transfer into savings. Unfortunately, this method often leaves you with nothing to transfer into your emergency fund, savings account, investment account, or other savings vehicle.

That’s where paying yourself first comes in. With this budgeting method, you prioritize your savings before your spending rather than the other way around. If you’ve been struggling to boost your savings, the pay-yourself-first method might just be right for you.

What it means to pay yourself first

Paying yourself first — also known as reverse budgeting — is a savings strategy where you prioritize your savings and only spend what’s left afterward. When you get paid, the first thing you do is transfer money into your savings account or toward other financial goals.

“It’s a great way to make sure you’re not spending all your money on things you don’t really need, and it can help you build up a safety net for emergencies or retirement,” said Anna Barker, personal finance expert and founder of LogicalDollar.

Why is it called a “reverse budgeting” strategy?

This method is known as a reverse budget because it’s literally the opposite of how most people plan their budgets.

First, they calculate their total monthly income so they know how much they have available to spend. Next, they add up the cost of their living expenses, including housing, car insurance, debt payments, utility bills, and more. Finally, they budget money — often everything that’s left — toward discretionary spending like dining out and entertainment.

It’s only after they’ve budgeted for everything above that someone considers how much they’ll save each month. And because they’ve reserved savings for last, it often ends up being a small amount.

When you pay yourself first, saving is the first line item in your budget. You decide how much you want to save, and it’s only once you’ve done that you determine what’s left to spend.

It’s a great way to make sure you’re not spending all your money on things you don’t really need, and it can help you build up a safety net for emergencies or retirement.” — Anna Barker, personal finance expert and founder of LogicalDollar

The importance of pay-yourself-first budgeting

It’s a fact that many Americans aren’t saving enough. The 2023 Bankrate Annual Emergency Savings Report found that only 43% of people could pay for a $1,000 financial emergency with their savings — which means that 57% couldn’t.

Financial emergencies are practically inevitable, even if they look different for everyone. It could be a broken-down car, an unexpected medical emergency, a job loss, or something else entirely. But at some point, there’s a good chance you’ll have to rely on your savings.

And when you use the pay-yourself-first strategy, you’re more likely to have the money set aside in your emergency fund when you need it.

But your emergency fund isn’t the only reason it’s important to pay yourself first. This strategy can also help you reach your big savings goals. It could help you save for a house or your dream vacation. And if done over many years, it could help you retire.

“In addition, paying yourself first can help you develop good financial habits and discipline,” Barker said. “By consistently setting aside money for savings, you’re building a healthy financial habit that can lead to greater financial stability and success in the long run.”

To Barker’s point, it’s true that once you build that savings muscle, it becomes easier to fall back on when you need it.

Pro Tip

Paying yourself first can also help you save money on taxes when it comes to retirement savings. Accounts like 401(k)s and IRAs are tax-advantaged, meaning the more you save, the less you’ll pay in taxes.

How to pay yourself first

Paying yourself first sounds easy in theory. But like most things, it takes a bit of planning and effort on your part. Here’s how to get started:

  1. Assess your monthly budget. Before you can implement this strategy, you need to know how much room you really have in your budget. Start by assessing your monthly income and expenses to see how much you can afford to put toward savings each month or pay period.
  2. Decide how much to pay yourself. Once you’ve assessed your budget, it’s time to set your monthly savings goal. If you don’t think you have much wiggle room in your budget, start small, and you can increase this number over time.
  3. Identify savings goals. It can be helpful to determine what exactly you’re saving for. Though it’s important to set money aside for your emergency fund and retirement, you can also use this strategy to save for fun savings goals.
  4. Set up automatic transfers. This is the real magic of the pay-yourself-first system. Don’t rely on your willpower to help you save money each month. Instead, set up automatic transfers to the investment and savings accounts you’re saving money in so it will happen every month without you thinking about it. And depending on your employer, you might even be able to set up your direct deposit to go into multiple accounts, so the money never lands in your checking account at all.

The 50/30/20 budget provides a useful rule of thumb on how much to pay yourself every month. Use the calculator below to see what paying yourself first 20% of your income would look like.

50/30/20 Calculator

The 50/30/20 calculator is based on the recommended budgeting strategy where 50% of your income goes to needs, 30% goes to wants, and 20% goes to savings.

Pro Tip

Depending on your savings goals, you might have money automatically going to multiple accounts, including a high-yield savings account, a retirement account, and more. To compare which high-yield savings account may be best for your budget, take a look at some of the accounts below.

Downsides of paying yourself first

Paying yourself first can be an incredible strategy to help you build savings and create healthy financial habits. However, it does have some downsides, and it’s not right for everyone.

First, this method requires that you actually have the money available each month to send to savings. If you have an irregular income, there could be months the money simply isn’t there. Likewise, someone who lives on a low income or overspends could find that they don’t have enough for their bills after they’ve transferred money to savings.

“This could lead to missed payments, late fees, or even debt,” Barker said. “This is exactly why you need to work out your monthly expenses before starting to pay yourself first to ensure you have enough to cover your necessities.”

Unfortunately, this can create even more problems such as going into high interest debt (like credit card debt) or harming your credit score.

Don’t forget to build “fun money” into your budget

According to Barker, the concept behind paying yourself first could also lead to restrictions for certain people.

“By prioritizing savings and investments, you might miss out on some fun experiences or purchases that could bring you joy and fulfillment,” Barker said. “That’s why I always recommend including some ‘fun money’ in your budget each month, as not only is it better for you, but it makes it far more likely that you’ll actually stick to your budget.”

Personal finance, like anything else, is all about balance. While it’s important to save money, it’s also important to make sure you have enough money left in your budget to live a comfortable and happy life.


How much should I pay myself first?

There’s no one right answer for how much you should save each month using the pay-yourself-first method. You can assess your budget and set financial goals to determine an appropriate target savings amount.

What is an example of a pay-yourself-first budget method?

An example of paying yourself first would be setting up an automatic transfer from your checking account to your savings account the day you get your direct deposit each month. The money comes out of your checking account before you have a chance to miss it. You’re building savings without even having to think about it.

What is the 50/30/20 rule?

The 50/30/20 rule is a budgeting method made famous by Elizabeth Warren. This rule says that you spend 50% of your income on needs, 30% of your income on wants, and 20% of your income on savings and debt. For someone unsure how much to pay themselves first, this budgeting method can act as a guideline.

Key Takeaways

  • Pay-yourself-first is a budgeting strategy where you prioritize saving in your budget ahead of spending.
  • Paying yourself first can help to ensure you have enough money set aside for financial emergencies, as well as help you to reach your other financial goals.
  • To pay yourself first, you should assess your budget, decide how much you can afford to save, set financial goals, and set up automatic transfers in your bank account.
  • Pay yourself first isn’t right for everyone, especially those who have an unstable income and may not reliably have money to transfer to savings.

One thing that can be helpful when setting up any budgeting system is to have the right tools by your side. We’ve rounded up a list of the top money management tools to help you manage and make the most of your money.

View Article Sources
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