Understanding the pay yourself first budgeting method (2024)

Cyrus Vanover | Citizens

With the cost of seemingly everything increasing at a blistering pace, saving money may seem like an impossible task. With the right budgeting strategy, however, saving for a short- or long-term goal is achievable. Budgeting can help you pay down debt, save for retirement or afford a major expense, like a house, car or vacation.

The pay yourself first method is a simple money management strategy that is easy to follow. It makes saving a top priority, and contributions to your savings account can be automated to free your time for other things. There are several budgeting strategies you can use to reach your financial goals, but the right strategy will be the one that works best for you.

Pay yourself first budgeting is sometimes referred to as "reverse budgeting" because your savings goals are prioritized instead of your expenses. The simplest explanation is that paying yourself first means depositing a portion of each paycheck directly into your savings. The remainder is then spent on your expenses.

The budget's simplicity is an important reason why it can work well. You can even set up automated deposits or transfers with your bank so that money is automatically sent straight into your savings account when you get paid. This prevents you from forgetting and can ensure your savings continue to grow without you manually moving money every month.

The pay yourself first method also helps you develop a savings habit. Rather than having excess money in a checking account, where you might be tempted to impulse buy or not heed your own spending limits, your money can automatically go toward saving for your short- and long-term financial goals. As you achieve these wins, you may be encouraged to save for even larger goals, like owning a home or putting money toward retirement. Need help saving for these goals? Using financial tools, like Citizens Savings Tracker™¹, can help you reach your goals with ease!

1. Calculate your take-home income

This is the amount you receive after taxes and the costs of any benefits like health insurance have been deducted. If you are an employee, these amounts are pre-deducted when you are paid. If you are self-employed, you will have to estimate your tax liability to determine your true take-home income.

2. Determine how much you should pay yourself

Many financial experts recommend saving 10% to 20% of your income. The amount you save, however, will vary based on your income, expenses and how much time you need to reach your goal.

3. Set up an automated deposit or transfer

Although you can manually transfer money to a savings account, setting up automated deposits can help you grow your savings without thinking about it. It ensures that money will be consistently deposited into your savings account before you have a chance to spend it. Most banks offer automated deposits, and getting started is usually quick and easy.

4. Allocate what's left over to the expenses in your budget

The money that's left over is allocated to each of your expenses. For example, you could put 20% to housing, 10% to groceries, 10% to entertainment and so forth until all of your budget categories are covered.

5. Review and adjust to align with your goals

It's important to periodically review your progress at least every six months. If you discover that you have a lot of money left over after covering your expenses, consider increasing the amount you pay yourself each month. You may decide you want to set up deposits for afew different savings accounts to work toward multiple savings goal.

There are several different types of savings accounts that you can use with the pay yourself first method. Be sure to consider the features and benefits of each account to see which option is best for your needs:

• 401(k) or IRA
• Traditional savings account
• High-yield savings account
• Money market account
• Education savings account
• Health savings account
• Flexible spending account

If growing your savings is the most important goal to you, the pay yourself first method may be worth a try. Some aspects of this method may make it a better option than others:

• It's easy to understand and implement. The pay yourself first budgeting method requires very little time and effort. Since contributions to your savings are automated, you don't have to think about deposits after you set it up. The savings happen automatically.
• It prioritizes your savings. When you pay yourself first, your savings are the primary focus of your budget. Your expenses are taken care of only after money is taken out to deposit into a savings account.
• You can quickly build an emergency fund. Whether it's a job loss, car repair, pet emergency or something else, an emergency fund can be a lifeline if something happens. The pay yourself first budgeting method can help you grow your emergency fund to have a financial cushion for unexpected expenses.
• It helps you make steady progress toward your savings goals. Saving for a short- or long-term goal can be challenging if you have to remember to set money aside every time you are paid. Because the pay yourself first budgeting method automates your savings, it helps you reach your savings goal on autopilot.

The pay yourself first budget method is best for those who want to grow their savings without spending too much time and effort on it. It's ideal for those who are busy and prefer a simplified or automated approach. It also usually makes more sense for people who receive regular paychecks or business owners who make regular owner withdrawals.

Although the pay yourself first method is effective for many people, there are some situations where another budgeting method may be a better option, like when you have irregular income or you prefer a more detailed way of tracking your expenses. Also, if your primary goal is something other than saving, like paying off debt, another budget may be a better choice.

If your top priority is growing your savings, the pay yourself first budget is worth considering. Unlike other budgets, you don't have to keep a detailed spreadsheet, so it can mean a lot less time and effort trying to track every expense. The simplicity may increase the chances that you will stick to it and achieve your savings goals.

Ready to start budgeting your finances? Learn how to open a savings account with Citizens.