What Does It Mean to Pay Yourself First?

Read our Advertiser Disclosure.
Contributor, Benzinga
October 17, 2023

“Pay yourself first” is a pillar of financial wisdom, which reminds you that you should prioritize setting aside money for long-term planning. In the US, this is usually done by routing your paychecks into a savings account. Although this may seem like an easy concept, in reality, it’s a much more complicated concept for people to embrace since we’re built to worry about short-term priorities (like bills or nights out) over long-term ones (like retirement or college funds). It’s about establishing savings and investment goals and using income efficiently to meet them.

What Is ‘Pay Yourself First?’

What does it mean to pay yourself first? For starters, it doesn’t mean ignoring bills or debt obligations in favor of traveling, retail therapy or other forms of pleasure spending. Instead, paying yourself first is a budgeting method that means taking care of savings and investments before buying new items or planning leisure activities.

One good way to consider paying yourself first as a budgeting technique is to view the version of your future “self” getting paid. With pay yourself first, you aren’t paying your current self - you’re allocating money to your future self, a version of you who may need investments for retirement or savings for an emergency fund.

Establishing a pay-yourself-first routine may be daunting at first. How are you supposed to allocate the money you earn to long-term savings without hurting financially in the present? Like many financial planning techniques, this takes time, energy, and is best approached with incremental build-up. You can start by establishing savings and investment goals while creating good spending habits. 

How to Start Paying Yourself First

Before putting a chunk of your paycheck into a savings or brokerage account, you must review your financial situation and determine your monthly income and obligations. For example, if you take home $4,000 per month and have fixed living expenses of $2,500, you’ll know what you can devote to investments and savings. Paying yourself first won’t work if you neglect your monthly bills or debt obligations. 

1. Evaluate Your Monthly Income and Nonnegotiable Expenses

First, calculate your nonnegotiable monthly expenses, such as rent or mortgage, utilities, loan payments and groceries and compare them to your monthly income. What percentage of your take-home pay goes toward these nonnegotiable items? Determine how much of your income is devoted to these expenses before moving to the next step.

2. Review Your Budget 

Once you’ve established your monthly income and expenses, create a budget and look for places to reduce spending. Many financial professionals love to “spend shame” people for buying lattes or ordering takeout too often. But if these items fit comfortably into your leisure spending category, you don’t need to deny yourself. Frugality means spending on what’s important to you, not depriving yourself of all simple pleasures. However, if they do, consider how you can cap or limit this spending by setting a reasonable budget for these small joys. 

3. Identify Your Savings Goals

Putting aside three months of living expenses in a Federal Deposit Insurance Corp. (FDIC)-insured savings account is a good rule of thumb to build an emergency fund. For example, if you have $2,500 in average monthly expenses, you’ll want to keep at least $7,500 in savings. If you take home $4,000 per week, you’d have $1,500 left over after monthly obligations. This ‘leftover’ income can be put toward savings, investments, or both. 

4. Create a Savings Strategy

Once you grasp your monthly budget and create some goals, you can start implementing your savings strategy. This step is where you’ll really start to pay yourself first. For example, to build that $7,500 emergency fund, you’ll need to save about $750 per month to reach that goal in 10 months (or $187.50 per week). Or if you are planning a $4,000 overseas vacation for next summer, you’d want to save $77 per week over 12 months.

Another strategy is not about recurring monthly or weekly savings deposits or investments. Instead, it uses predictable lump sums like tax returns or end-of-year bonuses to build your savings. If you have a $2,000 tax refund, you can use that lump sum to build that overseas vacation fund and then you only need to save an additional $2,000 to meet your goal.

5. Assess and Adjust as Needed

A savings strategy doesn’t need to be rigid to work. For example, if you get a boost from a larger-than-expected tax return, you may want to devote a larger chunk of that to your savings goals. If your income changes or you move to a new house, you must reassess your budget. Your financial picture constantly evolves, so you should write budget strategies in pencil, not ink and re-assess them frequently.

What to Do After Paying Yourself?

Everyone should plan their emergency savings before investing, but once you’ve reached your desired level, you can continue to pay yourself first by allocating your money towards retirement by investing in assets like stocks or bonds. 

Advantages of Paying Yourself First

  • Gain control over your financial situation: By achieving your savings goals, you’ll be better prepared for unexpected medical bills or job loss. Many Americans struggle to come up with cash in emergencies, but those who embrace paying themselves first are better prepared when emergency strikes.
  • Reduce impulsive purchases: Paying yourself first creates good spending habits by limiting the ability to make impulse buys. Many people consider their leisure budget to be whatever is left over after they’ve paid bills. But by incorporating and setting leisure spending into your budget, you can reduce the urge (and ability) to buy things you don’t need while still enjoying the purchases that give you joy.

Things to Keep in Mind

Before you start stashing away money in a savings account, you should evaluate your debt situation. If you have high-interest debt, you might want to concentrate on paying that debt off first before putting money into savings or investments. A debt spiral is counterproductive to the pay-yourself-first method because you’ll eventually need to use those savings to service debt payments which can hurt your savings efforts.

Although paying yourself first is effective because it ensures savings goals are the top priority, not everyone can park 10% of their monthly income into savings if they have unmanageable debt loads. If you have credit card debt, consider paying that first before putting money in an investment account.

Pay Yourself First Allows for Savings and Spending

Paying yourself first doesn’t mean skimping out on bills or not paying the mortgage; it means taking care of your future self before indulging your present self. By attending to your savings goals first, you’ll not only build a future nest egg or emergency fund but also limit the urge to impulse shop or spend your paycheck. With pay yourself first, you’ll learn to save whatever is left over. When you save first, you can spend what’s left over without guilt or shame. 

Frequently Asked Questions


Why is it important to pay yourself first?


Paying yourself first allows you to attain savings goals while promoting frugality and limiting impulse spending decisions.


How much should you have to save from your income?


Everyone’s goals differ, but saving three months of living expenses before considering investments or other goals, like a wedding or travel fund, is a good place to start.


Is it ideal to invest your savings in paper assets?


Because savings may need to be accessed in an emergency, this cash is best kept in an accessible and stable value vehicle like a savings account, certificate or deposit, money market account, or short-term government bond. Don’t put money that you may need within the next year into stocks. 

Dan Schmidt

About Dan Schmidt

Dan Schmidt is a finance writer passionate about helping readers understand how assets and markets work. He has over six years of writing experience, focused on stocks. His work has been published by Vanguard, Capital One, PenFed Credit Union, MarketBeat, and Fora Financial. Dan lives in Bucks County, PA with his wife and enjoys summers at Citizens Bank Park cheering on the Phillies.