How to 'pay yourself first': Save more money with the 80/20 budget (2024)

Is life getting in the way of your savings goals? It can be hard to tuck money away when you have bills to pay and essentials to buy. By the time you've taken care of your monthly needs (and maybe a few wants), your bank account might be just about empty.

If this sounds familiar, you might benefit from the "pay yourself first" approach to budgeting. This strategy puts saving for the future at the top of your financial to-do list—before your hard-earned money goes anywhere else.

What is the 'pay yourself first' budget?

The "pay yourself first" budgeting method has you put a portion of your paycheck into your retirement, emergency or other goal-based savings account before you spend any of it. When you add to your savings immediately after you get paid, your monthly spending naturally adjusts to what's left.

How does the 80/20 rule factor into paying yourself first?

The 80/20 rule is a simple guideline that you can follow to pay yourself first. It means putting 20% of your income toward savings and 80% toward everything else. Paying yourself first can be effective because it ensures you save something every pay period, and it reduces the chance that you'll spend money you intended to save.

What are examples of paying yourself?

Paying yourself first—sometimes called reverse budgeting—may seem like a fresh approach to your budget. But you may have already encountered it without knowing its name. Paying yourself first can describe any scenario in which you prioritize saving for the future over current spending. Here are a few common examples:

  • You contribute part of your paycheck to an employer-sponsored retirement savings plan, such as a 401(k).
  • You set up a split direct deposit so a portion of each paycheck goes to a savings account while the rest goes to checking.
  • You pay monthly premiums to a permanent life insurance contract that accumulates cash value.

How do you pay yourself first?

Paying yourself first involves a few easy steps:

1. Decide what percentage of your income to save.

While the 80/20 budget works for some, you can choose any percentage you want.

If your fixed expenses are high, you might save 10% of your income. If they're low, you might save 30%. Pick an amount that somewhat challenges you but that's realistic to set aside each month.

To find the sweet spot, you'll need to find a budgeting method that works for you. Here's how to pull together a simple view of your income and expenses:

  • Determine your monthly income before taxes. Let's say it's $9,000.
  • Review your essential expenses—including taxes, housing, utilities, loan payments, transportation costs, child care, food, medical expenses and other bills. Use a budgeting app, such as BalanceWorks®, to determine where your money's going. Let's say these total $6,500.
  • Review your nonessential expenses, such as going out for dinner and seeing movies. Let's say your total is $700.
  • Total up your expenses ($7,200) and subtract them from your income ($9,000). Then divide the result ($1,800) by your income to get the percentage available to save (20%).

Make sure you're happy with the amounts you're saving and spending, and ask yourself whether there are opportunities to spend less. When you find ways to cut expenses, you can use the money you're freeing up to boost your savings.

Pay yourself first

2. Decide where to direct your savings.

If you're saving 20% of your income, you might want to put 10% into a retirement account, 5% into emergency savings and 5% into travel savings. Do what supports your goals.

Choose or create specific savings or investment accounts that you'd like the money to go into. Some banks make it easy to open multiple savings accounts or create "buckets" within a single savings account to help you save for multiple goals and easily track your progress.

3. Set up automatic transfers.

Once you've arrived at a number you're comfortable with, you can set up automatic payments to ensure you always get paid first. This money shouldn't stay in the account you use day to day because it would be easy to accidentally spend or overlook it.

For instance, if you get paid electronically, you might allocate10% of your pay into your workplace retirement plan, send 10% to your savings account and send the remaining 80% to your checking account.

If you're paid irregularly or by check, you can set up a recurring transfer. This allows you to move money from your checking account to a designated savings account at a certain time every month. You can automate transfers to investment accounts, too.

How to 'pay yourself first': Save more money with the 80/20 budget (7)

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Is paying yourself first right for you?

Putting a "pay yourself first" strategy into action is pretty straightforward. But before jumping in, consider whether paying yourself first will work for you and how it might affect your other financial goals.

Limited budget constraints

If 100% of your earnings go to necessary bills, then you're living paycheck to paycheck, and paying yourself first may not be possible at the moment. In that case, you're better off focusing on strategies to grow your income, make your lifestyle more affordable or decrease your debt.

Stuck on spending

Paying yourself first may not be helpful if you're spending without limits or taking on credit card debt. You might benefit from controlling your discretionary spending before setting out on this strategy as the interest rate you'll pay for debt will almost always be higher than the interest rate you'll earn on savings.

If you aren't living beyond your means and you just haven't prioritized saving, paying yourself first could be a worthwhile endeavor.

Balancing debt payoff

The trade-off between growing savings and paying down debt is complex. Keep these general guidelines in mind:

  • You may want to go ahead with paying yourself first and stick with minimum monthly payments on debts for now if you haven't established an emergency fund yet. Once you've built up some emergency savings, you could pause paying yourself first and instead direct that money toward reducing your debt.
  • If you haven't started saving for retirement yet, that could be a reason to prioritize paying yourself first alongside a debt reduction plan. Retirement accounts often come with tax advantages, an employer match and opportunities to experience compound growth over time, especially if you start saving as early as possible.
How to 'pay yourself first': Save more money with the 80/20 budget (8)
  • Compare the interest rates you're paying on your debts with the rate of return you get on your savings or investments. If you're dealing with high-interest debt, paying it down might be the more urgent priority. But you might want to go forward with paying yourself first if you have a low-interest student loan, car loan or mortgage.

It doesn't have to be an either/or decision. If you calculate that you can cut 30% of your discretionary spending, you might choose to pay yourself first with a portion of it while using the rest to pay down high-interest debt. Once your debts are paid off, or perhaps refinanced at a lower rate, you can put more money toward savings.

Conclusion

It can help to discuss a "pay yourself first" strategy with someone who has experience managing finances. A

Thrivent financial advisor

can answer your questions and offer insight on the right approach for you to meet your long-term financial goals. They also can help troubleshoot any challenges you encounter along the way.

You also can sign up for

Money Canvas

from Thrivent, a free one-on-one coaching program that helps you budget with ease, trim bills and tame spending.

How to 'pay yourself first': Save more money with the 80/20 budget (2024)

FAQs

How to 'pay yourself first': Save more money with the 80/20 budget? ›

The 80/20 rule breaks out putting 20% of your income toward savings (paying yourself) and 80% toward everything else. Once you've adjusted to that 20% or a number you're comfortable with saving, set up automatic payments to ensure you stick to it.

How might paying yourself first saving first before spending help your cashflow and budget? ›

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.

What is a good way to start paying yourself first? ›

You can start by moving money into a savings account regularly with each paycheck.
  1. Ask your employer to split your direct deposit. ...
  2. Another savings strategy is to set up an automatic transferFootnote 2 2 for each payday, ...
  3. How to set up automatic transfers. ...
  4. Establish a dedicated savings account.

How does pay yourself first change your spending plan or budget? ›

Paying yourself first means saving money before using it for bills and other spending. This approach to budgeting protects against financial emergencies and provides for future opportunities. Automatic transfers from your paycheck to dedicated accounts for saving are an easy way to make paying yourself first work.

What is the pay yourself method? ›

"Pay yourself first" is a personal finance strategy of increased and consistent savings and investment. The goal is to make sure that enough income is first saved or invested before monthly expenses or discretionary purchases are made.

What is a good first step when budgeting? ›

1. Assess your financial resources. The first step is to calculate how much money you have coming in each month. This might be investment income, government assistance, student loans, employment income, disability benefits, retirement pensions or money from other sources.

What is rule number 1 of paying yourself first? ›

Key takeaways

The "pay yourself first" budget has you put a portion of your paycheck into your savings account before you spend any of it. The 80/20 rule breaks out putting 20% of your income toward savings (paying yourself) and 80% toward everything else.

What should you always pay first? ›

Mortgage or Rent Payments

A safe home for you and your family always comes first, so paying your rent or mortgage should always be your highest priority payment. Plus, you don't want to risk being evicted or having your home foreclosed by being late or continuously missing payments.

How do I decide how much to pay myself? ›

To determine your salary, you need to first estimate your company's annual gross revenue and subtract all operating costs, such as rent, employees' salaries, inventory and supplies. Make sure to set aside extra to cover emergency expenses or business debt, such as payments for a small business loan.

What are the disadvantages of pay yourself first? ›

Cons. Potential downsides to paying yourself first include: Transferring too much to savings: Not keeping enough money in your checking account can be harmful for your finances. Always keep a cushion in your checking account to avoid paying overdraft fees and possibly monthly service fees.

What is the 50 20 30 rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.

What does Robert Kiyosaki mean by pay yourself first? ›

The goal is to pay yourself first and always to have money to invest. Once you have money for investments, you should learn about assets worth investing in so that your money grows faster than the inflation rate.

How to save money pay yourself first? ›

Key takeaways

Generally, “pay yourself first” means what it says—set aside money for savings before paying bills and making other purchases. But it's still important to keep up with debt obligations. Automatic transfers can make it easier to pay yourself first.

What is the pay yourself first activity? ›

Pay Yourself First in Action

Set up automatic transfers from your checking account to your savings account every month, ideally just a day or two after you normally get your paycheck. This is the paying yourself step.

How do I pay myself automatically? ›

How to Pay Yourself First. The easiest way to save is to open a savings account at the bank where you maintain a checking account. This gives you a convenient way to make transfers or deposits as soon as you get paid. Make it an automatic transfer, either for every payday or once a month, whichever works for you.

Why might it be a good idea to prioritize savings and needs first when budgeting? ›

It means setting aside a realistic portion of your income every time you get a paycheck and before you start spending it on anything else. The first goal is to save enough for an emergency fund that will cover the cost of a crisis. Keep saving and it will turn into a fund that can be tapped for other needs and wants.

Why is it important to pay yourself first before you pay your bills? ›

It means putting 20% of your income toward savings and 80% toward everything else. Paying yourself first can be effective because it ensures you save something every pay period, and it reduces the chance that you'll spend money you intended to save.

Why does saving before spending matter? ›

Most people know they should be saving a portion of their income, but they might not grasp all of the benefits of doing so. Saving is an important habit to get into for a number of reasons — it helps you cover future expenses, manage financial stress and plan for vacations, just to name a few.

Why should you save first before paying any of your other bills? ›

With compound interest, even small contributions to your retirement plan can grow significantly. No emergency savings: The top reason to make saving a higher priority than paying down debt is to build your emergency fund.

References

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