What It Means
Pay yourself first means moving a set amount into savings as soon as a paycheck arrives, before paying bills or spending on anything else. The saving usually happens automatically, through a split direct depositDirect depositA payment, such as a paycheck or government benefit, sent electronically straight into your bank or credit union account instead of as a paper check. See more or a transfer scheduled for payday. Because that money leaves checkingChecking accountA bank or credit union account for everyday money going in and out, used by debit card, checks, transfers and direct deposit. See more right away, the rest of your budgetBudgetA plan for a set period, usually a month, that lists the money you expect to receive and how you'll spend or save it. See more works with what remains.
Try It: Walk Through a Pay-Yourself-First Payday
Walk through one payday in pay-yourself-first order. Change the numbers to match your paycheck.
Saving of each paycheck.
Savings plus bills come to more than the paycheck. Lower the percentage for now; Syracuse University's guide says you can start with as little as $10 a paycheck.
How It Sounds at Home
- "Savings comes out before I even see it."
- "I pay myself first, then the bills."
- "Ten percent goes straight to savings on payday."
The Breakdown
Worked example. Luis takes home $2,000 every two weeks and saves 1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more% first:
| Step | Amount |
|---|---|
| Paycheck lands | $2,000 |
| Transfer to savings (10%) | $200 |
| Bills due before the next paycheck | $1,100 |
| Left for spending | $700 |
Over 26 paychecks a year, that's $5,200 moved to savings without deciding each time.
How to set it up
- Pick an amount or a percentage you can keep up.
- Choose where it goes: an emergency fundEmergency fundMoney set aside only for unplanned costs, like a car repair, a medical bill or a lost paycheck, kept where you can reach it quickly. See more, a retirement account or a savings goalSavings goalA specific amount you plan to save by a set date for one purpose, which turns into a monthly or per-paycheck amount to set aside. See more.
- Ask your employer whether you can split your direct deposit, or schedule a payday transfer at your bank.
- Raise the amount when your pay goes up.
What the result means. The $700 left is Luis's spending money until the next payday. If that feels too tight, lowering the percentage keeps the habit in place better than skipping the transfer some months.
Where It Comes From
A close relative of the idea runs through the parables of George S. Clason, a Denver businessman who in 1926 put out the first of a series of pamphlets on thrift, each story set in ancient Babylon. Banks and insurance companies handed them out in large numbers, and the best known, The Richest Man in Babylon, is still in print. Its central lesson is that you should hold on to some share of all you earn for yourself.
Good to Know
The Consumer Financial Protection Bureau recommends making saving automatic. Splitting a paycheck through direct deposit only works if your employer offers both direct deposit and the option to divide it between accounts; otherwise a transfer scheduled at your bank for payday does the same job. Syracuse University's financial literacy guide suggests saving 10% to 20% of pay, and notes you can start smaller, such as 5% or $10 a paycheck. Before choosing an amount, check that the bills due before your next paycheck are still covered, since an overdraft feeOverdraft feeThe flat charge a bank adds each time it pays a transaction your checking account couldn't cover, on top of the negative balance you repay. See more would eat into what you saved.
FAQ
How much should I pay myself first?
Syracuse University's guide suggests 10% to 20% of pay. If that doesn't fit yet, start with 5% or a flat amount like $10 a paycheck and raise it later.
What if paying myself first leaves too little for bills?
Lower the amount until bills are covered. A smaller automatic transfer keeps the habit going, and you can increase it after a raise or once a debt is paid off.
Where should the money go?
Somewhere separate from everyday checking so it isn't spent by accident, such as a savings accountSavings accountA bank or credit union account for money you're setting aside for later, which earns interest and is insured up to federal limits at insured institutions. See more for your emergency fund, a retirement account, or an account for a specific goal.
Do It in Buhata
Budget, repeating entries
Add your payday transfer to savings as a repeating entry in Budget on the same schedule as your paycheck, so it's planned before any other spending.
Open BuhataRelated Terms and Categories
- Automatic savings
Saving that happens on a schedule without a decision each time, through a split direct deposit or a recurring transfer from checking to savings.
- Savings rate
The share of your income you save, found by dividing what you saved in a period by what you earned in that same period.
- Emergency fund
Money set aside only for unplanned costs, like a car repair, a medical bill or a lost paycheck, kept where you can reach it quickly.
- Direct deposit
A payment, such as a paycheck or government benefit, sent electronically straight into your bank or credit union account instead of as a paper check.
- Reverse budgeting
A budget that moves savings out first on payday and lets bills and everyday spending share whatever is left, without a limit for each category.
- 50/30/20 rule
A budgeting guideline that splits after-tax income into 50% for needs, 30% for wants and 20% for savings and paying down debt.
Sources
Consumer Financial Protection Bureau, "Looking for an easy way to save money? Make it automatic"; Consumer Financial Protection Bureau, "An essential guide to building an emergency fund"; Syracuse University, "Pay Yourself First"; Penguin Random House, "The Richest Man in Babylon" by George S. Clason; Penguin Random House, "George S. Clason"
- www.consumerfinance.gov/archive/blog/looking-easy-way-save-money-make-it-automatic
- www.consumerfinance.gov/an-essential-guide-to-building-an-emergency-fund
- financialaid.syr.edu/financialliteracy/financial-basics/pay-yourself-first
- www.penguinrandomhouse.com/books/294317/the-richest-man-in-babylon-by-george-s-clason
- www.penguinrandomhouse.com/authors/233902/george-s-clason
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