Pay yourself first: A smart budgeting approach to reaching savings goals
5 min read
Do you have the best intentions to save money, but end the month with virtually nothing left? We get it. Saving can be a real struggle — especially with rising costs on just about everything. Luckily, there’s a saving strategy simple to set up that can position you to get ahead financially. It’s a method called “pay yourself first.”
Read on to learn more about this effective money-saving strategy. It will leave you saying, “I can do this!”
What does it mean to pay yourself first?
If you’re wondering, “What does pay yourself first mean?”, we’ll outline the pay yourself first definition. Essentially, it’s a budget strategy with a spending plan around a specific savings goal. Paying yourself first means you consistently earmark a certain percentage or dollar amount from each paycheck towards a specific goal. Your savings goals can be long-term, like a house, a car, or other big-purchase items.
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Why does the pay yourself first strategy work?
Now that you know what paying yourself first is, let’s dive into why it works. In short, no matter what, paycheck after paycheck, you’re adding to your financial goal. It can add up quickly!
It puts money aside no matter what
When you pay yourself first, you set aside money every month without fail for important things that you want to save for — rather than aimlessly spending. It’s a tried-and-true method for sticking to a savings plan for people from all walks of life.
It’s automatic
When paying yourself first, you can set up automatic transfers into a separate account so that in future months you’ll be on the fast track to consistent savings.
How to pay yourself first
If you’re wondering how to pay yourself first, here’s the process in a nutshell:
1. Run the numbers
Determine your take-home pay – that’s how much money remains from your paycheck after taxes. Then, jot down each reoccurring monthly living expense you have. (Think grocery bills, rent, utilities, transportation, loan repayments, cell phone…)
2. Determine how much you want to pay yourself
The next step is to figure out how much to pay yourself each month. So, let’s say you want to set aside $300 a month and your take-home pay is $2,000 a month. You’ll take the $300 out first and plan the rest of your budget around $1,700. Of course, if you can’t pay all your other bills with $1,700, you won’t want to incur penalties or fees for any late or missed payments. If that’s the case, you can look for ways to save money and reduce expenses first, before reducing your $300 monthly savings goal.
Here’s where many people like the “pay yourself first” approach — it prioritizes your goal over unnecessary spending. For example, it may be easier to stomach reducing money spent on your streaming services when you know you’re putting extra dollars towards a down payment on a car instead.
3. Automate the process
There are ways to save without even thinking about it. So, playing on the example above, you’d take $300 out of your budget equation each month. Instead of having to remember not to spend that money, you can let automation put the money aside for you. That way you’re less tempted to spend it.
Spruce, a new mobile banking app, has a saving goals feature that will help you do this. With it you can set personalized goals, start adding money, and track your progress along the way.
Plus, you can shop with retailers you know and love using the Spruce debit card and get automatic cash backto use towards your financial goals.
4. Adjust as needed when you have life changes
Your income and expenses can change at any moment. Luckily, when you pay yourself first, you can change the amount carved out for yourself at any time. This is especially true if you use Spruce’s saving goals. In a few swipes and taps, you can update your saving goals.
You can adjust your saving goals to suit your unique circumstances. If you have a radical life change that impacts your gross income or monthly expenses – like a new house, baby, marriage, or job – your numbers and the goals themselves might look a bit different.
Let’s say you get a 5% raise. Considering the new money coming in, you choose to boost your monthly saving goal from $300 to $350 (using the example above). Ideally, you’d bump up your savings around the same time your raise hits, so your budget stays in check.
How much should you pay yourself first?
Everyone has a different number in their bank account – and that’s fine. The amount you pay yourself depends on your savings target amount, what you’re saving money for, and how much money (or net income) you have to work with.
Related: How much should I saved each month?
Pay yourself first with Spruce
As you’ve learned the ways to pay yourself first, know that Spruce is here to help you be good with money.
Find out more about all the amazing money management features Spruce has to offer.
Get started with Spruce today.
This information provided for general educational purposes only. It is not intended as specific financial planning advice as everyone’s financial situation is different.