If you've struggled to budget and save money in the past, you might be pleasantly surprised by "pay yourself first" budgeting. With this method, you will be less likely to spend money that can go toward your savings goals.
What it Means to Pay Yourself First
You know how important it is to save money. But if you're like most people, payday is probably every few weeks, and you tell yourself you'll set aside whatever's left in your checking account before the next payday arrives.
Oftentimes, however, there's little or nothing left at the end of the month for your savings plan when your next pay cycle rolls around, and you might never get started on your emergency fund or long-term goals.
One easy way to break this cycle is to pay yourself first by setting aside money into a long-term savings account. By doing so, you're removing the temptation to overspend and ensuring that you save enough money for your retirement plan and meet your financial goals.
How Does Reverse Budgeting Work?
It can be difficult to track your personal finances in-depth because you must constantly be aware of the amount of money you’re spending. "Pay yourself first," or "reverse budgeting," as it's also known, is one of the simplest and most effective budgeting strategies for reaching your savings goals.
Right after you get paid, all you need to do is set aside money for your savings strategy. Whatever is left in your checking account is what you use to pay your living expenses, such as rent/mortgage, groceries, and shopping, until your next payday.
Using this method, you decide up front what your savings goals are and how much you want to set aside from each paycheck, and then you do it. After that, you don't need to track every penny, as you do with other budgeting methods.
Advantages of Paying Yourself First
There are a few advantages if you pay yourself first:
- It's simple: There are no disclaimers, no numbers to write down, no budget limits to stay under and nothing to keep track of once you set up your savings plan.
- It's more intuitive: As humans, we tend to look at our monthly expenses and bank account balances and decide the amount of money to spend or set aside. Paying yourself first lets you do that while also achieving your financial goals.
- It's better for resistant budgeters: Many people try other budgeting methods or savings strategies but realize "pay yourself first" is a method that’s easy to stick with.
Drawbacks of Paying Yourself First
Some people who try the “pay yourself first” budgeting method find that it is not the right savings strategy for them. Here are some of the drawbacks:
- It may take some getting used to: You'll need to keep a close eye on your bank account balance, especially when you get started. If you keep your same spending habits, you may overdraw your account.
- Another budgeting program may work better: Some people find that a zero-based budgeting system that tracks every penny works better. If you don't mind the extra work, you may want to give those methods a try.
- May require more planning: It's easy to overspend if your bills aren't due until the end of the month. With the “pay yourself first” method, you may want to see if you can switch your due dates closer to your payday or pay your bills early.
- May be better to pay off high-interest debt first: If you’re juggling debt and savings, most experts recommend a blended approach. First, save up an emergency fund. Then, pay off high-interest debt, such as from credit cards. Then, focus on other savings, such as retirement, vacations, a new car or other long-term goals.
How to Start Paying Yourself First
If you're ready to get started on this savings strategy, you might wonder how, exactly, you pay yourself first. It's easy. Here's how to get started:
Do a one-off budget to start
Even if you don't track your budget each month, it's a good idea to write down how much you get paid and how much you can afford to “pay yourself.” To start, note all of the income you get each month, including payment from your job, side hustles, child support, etc. Next, write down all of your financial obligations, such as rent or mortgage, childcare, student loans, groceries, utilities, credit card debt and other living expenses.
Now you'll need to decide how much to pay yourself first, and how much to leave for fun purchases like restaurants and shopping. Remember that you're not a robot, and you deserve to have “fun” money, too. But you should also remember the importance of saving for the future and your long-term goals.
If you're intimidated by the pay yourself first method, then try starting small. Set aside $5 each payday, if that's all you can afford. In the beginning, you're establishing a new savings strategy, and any amount you save will help you reach your long-term goals. You can also always bump up your savings plan amount later.
Automate your finances
You don't have to manually make the transfers into your savings account each time you get paid.
You can set up automatic transfers or direct deposits that send money into things like your savings account.
The Bottom Line
The pay yourself first method can help you recognize that you and your family should be paid for your hard work. Instead of spending money, you're putting your loved ones first by thinking about your long-term goals and creating a savings strategy.
This reverse budgeting strategy is one of the most helpful ways to reach your financial goals, no matter your situation.