Managing your finances can be challenging, especially when you’re trying to balance saving for the future with covering your current expenses. One effective strategy that many people use to build savings and achieve their financial goals is the “pay yourself first” budgeting method. This approach prioritizes savings over spending, ensuring that you’re consistently putting money aside for the future. Here’s a closer look at how the pay yourself first budgeting method works and how you can implement it in your own financial life.
1. What is the pay yourself first budgeting method?
The pay yourself first budgeting method is a simple yet powerful strategy that involves setting aside a portion of your income for savings before you spend on anything else. The idea is to treat your savings like a non-negotiable expense, much like your rent or mortgage, utilities, or car payment. By doing this, you prioritize savings so that you’re consistently working towards your financial goals.
Key Concept: The core idea is to “pay yourself” by saving money first and then using the remaining funds to cover your regular expenses and discretionary spending.
2. How Does it work?
The pay yourself first method works by flipping the traditional budgeting process on its head. Instead of spending first and saving what’s left over, you save first and then spend whatever is left. Here’s how you can implement this method step-by-step:
Step 1: Determine Your Savings Goals
Before you start, it’s important to know what you’re saving for. Are you building an emergency fund, saving for a vacation, planning for retirement, or putting money aside for a down payment on a house? Clearly defining your savings goals will help you determine how much you need to save each month.
Brigit tip: Set specific, measurable, achievable, relevant, and time-bound (SMART) goals to stay motivated and track your progress.
Step 2: Calculate Your Savings Rate
Decide how much of your income you want to save each month. A common rule of thumb is to save at least 20% of your income, but this percentage can vary based on your financial goals and circumstances. The key is to choose a savings rate that’s sustainable for you.
Brigit tip: Start with a comfortable percentage and gradually increase it over time as your financial situation improves.
Step 3: Automate Your Savings
To make saving easier and more consistent, set up automatic transfers from your checking account to your savings account each month. This way, the money is saved before you even have a chance to spend it. Automating your savings helps reinforce the habit of paying yourself first and reduces the temptation to spend.
Brigit tip: If your employer offers direct deposit, consider having a portion of your paycheck automatically deposited into your savings account.
Step 4: Budget with what’s left
After setting aside your savings, use the remaining income to cover your regular expenses, such as housing, utilities, groceries, transportation, and discretionary spending. By budgeting with what’s left, you prioritize your spending and make more mindful choices about where your money goes.
Brigit tip: Track your spending to ensure you stay within your budget and adjust as needed to avoid overspending.
3. Benefits of the pay yourself first method
Builds savings consistently
The pay yourself first method ensures that you consistently put money aside for your future goals. This consistency is key to building a healthy savings cushion, whether for an emergency fund, retirement, or other financial objectives.
Encourages financial discipline
The pay yourself first method encourages financial discipline by prioritizing savings over spending. It reduces impulsive spending, helps you focus on what’s most important, and avoids wasteful expenses.
Simplifies budgeting
This method simplifies budgeting by making saving automatic. Instead of worrying about how much to save after covering your expenses, you save first and then live on what’s left. This approach can reduce stress and make it easier to stick to a budget.
Helps achieve financial goals faster
Because you’re saving consistently and treating savings as a top priority, you’re more likely to reach your financial goals faster. Whether it’s paying off debt, saving for a big purchase, or building wealth, the pay yourself first method keeps you on track.
4. Challenges and tips for success
Adjusting to a new budget mindset
Switching to the pay yourself first method may require a shift in mindset, especially if you’re used to spending first and saving later. It might take some time to adjust to a smaller budget for expenses, but the long-term benefits are worth it.
Brigit tip: Be patient with yourself and allow some time to adapt to the new budgeting approach.
Managing cash flow
Maintaining a consistent savings rate can be challenging if you have irregular income or face unexpected expenses. In such cases, flexibility is key. Adjust your savings rate temporarily if needed, but aim to return to your original plan as soon as possible.
Brigit tip: Maintain a buffer in your checking account to handle any short-term cash flow issues without dipping into your savings.
Avoiding the temptation to dip into savings
One of the challenges of saving consistently is resisting the temptation to dip into your savings for non-essential purchases. To avoid this, keep your savings in a separate account that’s not easily accessible, such as a high-yield savings account or a certificate of deposit (CD).
Brigit tip: Make your savings harder to access by using accounts with withdrawal penalties or delays.
The pay yourself first budgeting method is a powerful strategy for building savings and achieving financial goals. By prioritizing savings and automating the process, you can develop healthy financial habits and ensure that you’re always working towards your future. While it may take some time to adjust to this new way of budgeting, the rewards of financial security and peace of mind are well worth the effort. Start today by setting your savings goals, automating your savings, and watching your financial future take shape.
