How To Pay Yourself First (A Must-Read If You Hate Budgeting)

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What if I told you that you could make saving money so much easier by paying yourself first? 

This old but tried and true method is used by thousands of people around the world to reach their money goals faster and it can work for you, too. I use this method and find that it makes saving money not an option, but a necessity.

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What does it mean to “Pay Yourself First”?

Before we get started, we should probably talk about what it means to pay yourself first. Paying yourself first refers to putting your savings or 401(k) or IRA first and then the rest of your money going to things like living expenses. Creating the habit of paying yourself first leads to long-lasting wealth.

When people don’t use the pay yourself first strategy, they may spend more money on random purchases. When you pay yourself first when payday comes around, you have less money in your bank account to spend on random purchases. 

Benefits of paying yourself first:

  • Automatically save money without thinking about it
  • Reach financial goals much quicker
  • Less room to overspend since any “leftover” money is going to savings
  • Great for people who can’t keep money in their bank account and feel like they have to spend it

Here’s how to pay yourself first

1. Create a budget

Creating a budget is the most important part of the pay yourself first process. This is because you need to know exactly where your money is going and how much is left over each month.

Here is an 8-step guide to creating a budget. If you find that you have little to no money left over that could go into savings, I recommend finding ways to save money or make more money.

It’s important to not go crazy with savings in the beginning. You don’t want an overdraft to happen or not have enough money to pay off bills. You are more than welcome to increase savings later, but it’s important to be conservative at first.

To create a budget, you can use a budgeting app, budgeting planner, budgeting excel sheet, or a budgeting printable.

You may also find that your grocery spending is a bit higher than you’d like it to be. I recommend using Ibotta for cashback on groceries and the book Plant Based On A Budget. I have this book at home and it’s given me so many ideas for recipes that are tasty, healthy, and affordable. 

P.S. Sign up below for the FREE ultimate financial planner that includes printables like: debt tracker, income tracker, annual budget summary, savings challenges, financial goals, and debt thermometers!

2. Calculate how much is left over after expenses

Once you’ve created a budget, you can calculate how much money you have leftover after living expenses.

Living expenses include things like mortgage/rent, electricity, utilities, internet, cell phone, insurance, groceries, etc. You also want to factor in how much you spend on entertainment, restaurant outings, shopping, etc. 

So let’s say you make $3,000 a month after taxes. You get two $1,500 paychecks every other Friday. Your living expenses + fun spending are $2,500 per month. You have $500 leftover each month. You’d set up an automatic transfer (or manually pay yourself first) $250 each payday. 

3. Come up with savings goals

Savings goals make saving so much better. When you have a goal in mind, you’re motivated to reach your savings goal. 

What are some good savings goals to have? Here are a few.

  • Emergency fund 
  • House downpayment
  • Annual vacation

You can also use the pay yourself first method to go toward sinking funds. Sinking funds are a certain amount of money you set aside for a certain expense that usually comes up quarterly or annually. Your sinking fund is used to help manage your money. 

Here are some sinking funds you may want to consider having.

  • Holiday sinking fund (gifts and travel)
  • Birthdays gifts
  • Dental cleaning
  • Auto insurance (if you pay every 6 months)
  • Car repairs
  • Car registration
  • Annual taxes
  • Vacation
  • Pets annual physical and dental cleaning
  • Home repairs
  • Emergency fund
  • Clothes
  • School supplies

You can also use the pay yourself first method to go toward debt. The pay yourself first method is flexible and can be used toward savings goals, sinking funds, and debt. 

4. Set up automatic transfers

Setting up automatic transfers makes paying yourself effortless. If you’re anything like me, saving money randomly is hard. With the pay yourself first method, you’re making saving an absolute must, not an option. 

Most banks offer automatic transfers where you can set up the amount and date you want the transfer to happen. If you’re using the pay yourself first method to create an emergency fund, I recommend getting a high-yield saving account. A high-yield savings account is a type of savings account that typically pays 20 times the national average. For example, CIT Bank currently offers 1.70%, while my local bank offers .01%. Ouch. 

If you don’t have a high-yield savings account, CIT Bank is a great option. CIT Bank is an online bank that offers high savings rates compared to the local bank you might use. I use an online bank to park my emergency fund because the APY is much higher than my local bank, so my emergency fund is making some money while it sits in the account. 

Another great option is Betterment. Betterment is a robo-advisor that helps you invest and save money. You can set up automatic transfers with Betterment and even create goals within the dashboard. I love Betterment because they have fun charts that show you the predicted time you’ll hit your goal. The app is super simple and easy to use, even for a complete newbie to investing. You can check out Betterment here.

Final note

If you have trouble saving money and end each month wondering where your money went, you need to use the pay yourself first method.

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Do you use the pay yourself first method?

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