Are You Paying Yourself First? Here’s What It Means and Why You Should Do It

The idea of “paying yourself first” can sound appealing if you think it means splurging on payday. In reality, paying yourself first means focusing your income to pay off debt and build savings, before you think about other expenses. It requires discipline, but embracing that concept may put you in a better financial position in the long run.

The Federal Reserve Board reported in 2024 that less than half of Americans, only 48%, would be able to meet a $2,000 emergency expense using only their savings. Paying yourself first can protect you from surprise expenses and ease some other financial burdens as well.

What Does It Mean to Pay Yourself First?

Paying yourself first is a simple concept: Instead of using your income to pay your bills and save what’s left over, focus on saving first. Take savings off the top of your paycheck before you do anything else with that money. This concept has also been referred to as “reverse budgeting” because you’re budgeting your goals rather than your expenses.

Your goals might include big-ticket items like funding a comfortable retirement or putting your child through college, or they might be as simple as establishing an emergency fund for a worst-case scenario. The idea is to tuck those savings away before you pay your monthly bills or indulge in discretionary expenses. It’s all about timing and priorities.

The Advantages of Paying Yourself First

“Paying ourselves first is important because it’s too easy for our bills and expenses to expand to the amount of money we have, often not leaving anything leftover for savings,” says Michael Conticelli, CFS, CDFA, a financial advisor at Solutions Advisory Services in Florida. “We often find ways to spend what’s available.”

You’ll remove temptation and the need for strong self-discipline if you commit to paying yourself first, particularly if you do it in such a way that the matter is effectively taken out of your hands. The process keeps money out of your checking account, placing it into an appropriate savings vehicle so it’s not as easily accessible.

That might be a traditional savings account to establish an emergency fund, a money market account, an education or health savings account, or an IRA or 401(k), depending on what you’re saving toward.

Pay-Yourself-First Strategies

The success of paying yourself first depends on making it as painless and self-tailored as possible. You can achieve that in several ways.

How Much Should You Save?

Your first step is determining the percentage of each paycheck you want to dedicate to savings. Base your calculations on your take-home pay after taxes have been withheld by your employer. You’ll have to pin down an average amount if you’re paid hourly and your hours vary from week to week. You’ll need a realistic idea of your annual tax liability if you’re self-employed. Work with your net pay, not your gross pay.

Now determine how much of that income you want to save. Many financial gurus recommend 10% to 20% of your paychecks, but that may not be feasible depending on your living expenses. You might want to cut back on those expenses where possible.

Paying yourself first often requires adjusting your budget to free up money.

Set Up Automatic Transfers

A common pay-yourself-first technique involves automatically sending that savings portion of your paycheck to a savings account, where it’s a little harder to spend. You can set up an arrangement with your bank to have a portion of your deposits immediately diverted to another account.

Your employer might be willing and able to establish automatic paycheck deductions for you and send that portion of your pay to an account of your choice on payday. The idea is that you don’t “see” the money.

“Automatic savings plans can take many forms,” according to Robert R. Johnson, Professor of Finance at Heider College of Business, Creighton University. “You can have a specific dollar amount or salary percentage taken out of each paycheck and put in a retirement plan or savings plan. The biggest advantage of automatic plans is the behavioral underpinnings. Inertia and the inherent laziness of people tend to work in our favor. Once enrolled in an automatic savings plan, people tend to stay enrolled.”

Grow Your Plan

Experts often recommend that individuals and families establish an emergency fund first. It should be sufficient to cover three to six months of living expenses in a catastrophic situation, such as losing your job or becoming seriously ill. This ensures that your bills will still be paid as you recover.

Once you have an emergency cushion, you can move forward and focus on more long-term goals. This might be a good time to set up an IRA.

Are There Any Drawbacks?

Paying yourself first is far more challenging for those with irregular incomes. It can be problematic to set up automatic transfers to savings if you’re not sure how much money you’ll be able to deposit from week to week.

Those who are living on a tight budget and paycheck-to-paycheck can find it almost impossible to dedicate any money to savings either before or after they pay other bills. Cutting back on necessities can be painful.

Another school of thought is that you should eliminate debt first and then save. The interest you pay on debt is effectively wasted money that you could be saving or investing. And you don’t want to commit so exclusively to saving first before addressing your other bills that you miss some debt payments and hurt your credit.

The Bottom Line

Establishing a pay-yourself-first financial lifestyle can be daunting, but you don’t have to plunge in feet first. It’s okay to start small and get used to living with the concept, particularly if you’re balancing the immediate needs of a family with your goal to save for the future.

Consider getting your feet wet with a 10% savings goal and consult with a financial professional to achieve more significant goals, such as college savings or funding your retirement.