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What Is the Pay-Yourself-First Budget?

What Is the Pay-Yourself-First Budget?

Jenius Bank Team11/26/2024
Man managing his finances on his phone.
Using the pay-yourself-first budget approach could help supercharge your savings. Roughly 74% of Americans follow some type of budget.1 And regardless of type, those budgets aim to help households stay on top of their spending and build savings. But there are dozens of budgeting methods and figuring out where to start could be a bit tough. While making just about any budget work for your situation is possible, some budgets are better suited to different purposes. If you want to build your savings quickly, the pay-yourself-first budget could be a great place to start. Let’s look deeper at how this approach works and help you decide if it’s the right fit for your finances.

Key Takeaways

  • The pay-yourself-first budget prioritizes building your monthly savings while covering your total necessary expenses.
  • Setting up automatic transfers after each paycheck or at least once a month may help you stay on track to reach your savings goals.
  • Having enough money in your checking account to cover the essentials could help prevent you from overdrawing your account.

What Exactly Is the Pay-Yourself-First Budget?

The pay-yourself-first budgeting system prioritizes building your savings over using your money for other spending categories whenever possible. Basically, you break your budget into three main categories: necessary expenses, fun purchases, and savings/debt payments, with the focus being the third.The name of the approach, “pay yourself first” insinuates that you would pay yourself (i.e., save) before ANYTHING else. We all know that it’s not practical to avoid paying your rent in order to save money. A more realistic approach to this system would be to save as much as possible according to your financial goals while still covering the cost of necessities like rent, mortgage payments, food, utilities, insurance, and other similar expenses. However, by shifting your mindset toward savings as a priority, it may help you to re-evaluate how much you spend on necessities and encourage you to seek a lower cost of living as a lifestyle option.Typically, those following this budgeting method set up automatic transfers from their checking account to their savings account to help them stay on track. Some people choose to schedule transfers with each paycheck, while others do so once a month.

How the Pay-Yourself-First Method Could Help with Debt Payments Too

Though the budget is predominantly used to help people build their savings, it could also be used to help you pay off debt faster. Rather than focusing on building your savings, you use the same principles to pay off your debt. This isn’t the textbook definition of “pay yourself first”, but it is just one example of how you could flex this, and any budgeting method, to suit your needs.If you think about it, paying off your debt is still paying yourself first. As you decrease the debt you carry, you also reduce the interest you owe on what you’ve borrowed. Over time, this could save you money, and as you pay off your debt, you’re able to use the cash you were using to pay off your debt to build your savings.

How to Pay Yourself First

Pay-yourself-first budgets are versatile and help you build your savings according to your goals. But regardless of what your goals are, there are a few steps you may want to follow to create an actionable pay-yourself-first plan.
  • Track your spending. The foundation of budgeting is tracking your spending, and one way to begin is to look at a typical month’s worth of data. This snapshot could give you an idea of where your money is going, how much you’re spending on necessities, opportunities to cut back, and the amount available for savings.
  • Figure out how much to pay yourself each month. Everyone’s savings goals are different. Consider how much you want to save based on your current income, necessary expenses, debt payments, and goals. You may be able to increase your savings goals over time.
  • Set up automatic transfers. Putting your savings on autopilot could make it easier to reach your savings goals. Have a portion of your paycheck go to a dedicated savings account or transfer your target savings amount from your checking account after your paycheck hits your account. This could help you avoid forgetting to save and the temptation to spend your savings elsewhere.
  • Review your progress and adjust as needed. As you start using this budgeting method, review your progress at least once a month to ensure you’re on track and validate your original spending data and trends. If you don’t have enough for necessities, you may need to adjust your allocations. If you’re spending too much on fun purchases, you may need to reevaluate your priorities and goals. And if you’re easily meeting or exceeding your savings target, you may want adjust your financial goals.

The Pros and Cons of Pay-Yourself-First Budgets

The pay-yourself-first budget could be an effective way to increase your total savings, but before you start, it’s a good idea to familiarize yourself with the pros and cons of this budgeting method.

The Pros of the Pay-Yourself-First Method

Here are a few benefits of using this budgeting method to focus on building your savings:
  • It’s streamlined: Other budgeting methods may require you to create numerous budgeting categories and allocate certain amounts of money to each category. This could be time-consuming or tough for people to stick to. The pay-yourself-first method is a simple concept: saving is the priority.
  • It helps you build a financial cushion: Since you’re focusing on building your savings, this budgeting method helps you build a financial cushion for emergencies, splurges, and more.
  • It helps you live within or beneath your means: When you focus on covering only your necessary expenses and saving as much as possible, you’re coaching yourself on how to live within or beneath your means each month. This may be especially helpful if you’re working with minimal income after losing your job or getting laid off.

The Cons of the Pay-Yourself-First Method

Here are a few of the cons you should be aware of before implementing this budgeting method:
  • It makes budgeting for discretionary spending more challenging: When your budget focuses on building your savings, it may make it harder to budget for non-necessary purchases each month.
  • It can be easy to neglect debt payments: Since the traditional approach to this budgeting method focuses so heavily on building your savings, it may be easy to continue only making the minimum payment on high-rate debt. Doing so may cost you more in the long run, so consider paying down your debt first and then increasing the amount you’re saving.
  • It could lead to overdraft fees: If you focus solely on building your savings as fast as possible, it could cause you to accidentally overdraw your checking account. Depending on your bank, overdrawing your checking account could result in overdraft fees. Monitor your checking account and ensure you leave enough to cover your necessary expenses plus a little buffer.

How to Decide if Paying Yourself First Is the Right Choice

The pay-yourself-first budgeting method is best for people who are ready to prioritize building their savings over other expenditures. And since everyone’s financial situation is unique, consider how this budgeting method may impact your finances and well-being before implementing it.As you weigh your options, take a long, hard look at your financial situation. If you’re already living paycheck to paycheck and struggle to keep up with your necessary expenses, this budgeting method may not be the best fit for your needs. But if you find it easy to keep up with your expenses and just want to take a more mindful approach toward your spending while increasing your savings, it may be a good choice.

Final Thoughts

The pay-yourself-first budget could be a great way to increase your savings while finding ways to live within or beneath your means each month. But it’s far from the only option you have at your disposal. If you’re trying to figure out how to create a budget and the different options, check out our guide.
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