What Is a Pay-Yourself-First Budget?

Pay-Yourself-First Budgeting Explained

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A pay-yourself-first budget works exactly as it sounds: You fund your savings goals first, then you use the rest of your paycheck however you like. While there are many benefits to this type of budget, there also are drawbacks to be aware of.

Here’s a closer look at how a pay-yourself-first budget works so you can decide if it’s the best method for you.

Definition and Examples of a Pay-Yourself-First Budget

A pay-yourself-first budget is a reverse budgeting strategy where you save a chunk of your income first—essentially treating your savings like a bill—then use the rest of your money to cover expenses and spend however you see fit.

  • Alternate name: Reverse budget

A pay-yourself-first budget is easier than other types of budgets because you don’t have to spend time tracking your expenses. As long as you’re prioritizing savings, covering your bills, and not taking on more debt, you’re good to go.

For example, let’s say your goal is to save 20% of your income. So you save 10% for retirement, 5% in an emergency fund, and 5% in a vacation fund. Now, you can freely spend the other 80% on wants and needs.

“My preferred budgeting method is reverse budgeting,” said R.J. Weiss, a certified financial planner and founder of The Ways to Wealth. “This method is when you're paying your goals first (e.g., savings, travel fund, house down payment, etc.) and then you're able to spend what's leftover. This way, one takes care of their goals, ideally through automatic transfers, and then can freely spend what's leftover.”

How a Pay-Yourself-First Budget Works

When you “pay yourself first,” you automatically set aside money for your financial goals as soon as you get paid. That way, money goes straight to your savings account, IRA, 401(k), and any other investment accounts first. You’re then free to spend the rest of your paycheck as you please.

A pay-yourself-first budget is a low-maintenance form of budgeting because it doesn’t require you to track every single penny you spend. As long as you’re hitting your savings goals and not overdrafting accounts or taking on more debt, you’re doing it right.


The 50/30/20 method and the 80/20 method are two types of pay-yourself-first budgets. With both of these methods, you save 20% of your income and use the rest for wants and needs.

Suppose you make $5,000 a month and your savings goals are to:

  • Max out your Roth IRA this year with $500 contributions each month if you’re 49 or younger ($6,000 yearly contribution limit up to 49 years old, $7,000 for 50 years and older)
  • Save $400 a month for a house down payment
  • Put $200 a month in an emergency fund
  • Stash $100 a month in a vacation fund

In all, you’d need to save $1,200 a month, giving you a savings rate of 24% ($1,200 / $5,000 = 24%).

You would then use the other $3,800 (or 76%) to cover your fixed and variable expenses, such as rent, utilities, groceries, phone bill, and eating out.


Do you have large savings goals you’re trying to reach? Break them up into biweekly chunks (or monthly chunks if you’re paid monthly), so you can easily track them. For example, if you want to max out your Roth IRA, which currently has a contribution limit of $6,000 per year, your savings goal would be $500 a month.

How To Build a Pay-Yourself-First Budget

Building a pay-yourself-first budget is a simple five-step process.

Create a Budget

You don’t need to religiously track your income and expenses with a pay-yourself-first budget. However, you do need to create a budget, so you have a baseline for how much you can pay yourself. Start by reviewing your bank and credit card statements and adding up your expenses. Compare those totals to your income to see how much extra money you have in your budget.


Spending fluctuates month to month, so consider adding up your purchases for the past three months, then averaging them together for a more accurate number.

List Your Savings Goals

Now it’s time for the fun part, where you decide what you want to do with your savings each month.

Going back to the previous example, if you have $400 leftover in your budget, you may decide to put $200 in a retirement account, $100 in an emergency fund, and $100 toward your credit card debt. How you spend the rest of your paycheck is entirely up to you.

Set Up Automatic Transfers

Once you’ve nailed down your savings goals, set aside an hour or so to set up automatic transfers to fund your savings goals. Set up automatic transfers for checking accounts, savings accounts, IRAs, and other investment accounts to coincide with when you’re paid. You can set up 401(k) withdrawals with your employer, too.

Spend the Rest of Your Money However You’d Like

Perhaps the biggest benefit of a pay-yourself-first budget is that you don’t have to waste time or mental energy trying to make sure you don’t overspend in certain categories. You have the freedom to spend the rest of your paycheck on your own terms.

Make Adjustments as Needed

If you find you don’t have enough money to cover all your wants and needs each month, look for ways to cut down on fun purchases or lower your fixed expenses (such as moving to a cheaper apartment or negotiating bills, for example). Also, look for ways to boost your income.

If you’ve done these steps and are still in the red, it may be time to lower some of your savings and debt payoff goals until you have a balanced budget. You can kick those goals back up once your financial situation is a little brighter.

What’s a Good Percentage To Pay Yourself?

When you’re creating a pay-yourself-first budget, one of the first questions you may have is “How much should I pay myself?”

Most experts recommend saving at least 20% of your income each month. But in real life, things aren’t always this easy. You may be living paycheck-to-paycheck or be at a point where you save 5% of your income—and that’s okay. Saving anything, even if it’s just a few dollars a month, is better than saving nothing at all.

Even just the practice of paying yourself first each month can pay off huge when your situation improves and you finally do have the opportunity to save more money.

Pros and Cons of a Pay-Yourself-First Budget

  • Low-maintenance form of budgeting

  • Prioritizes saving first

  • Automates your budget

  • Not ideal if you’re living paycheck-to-paycheck

  • Could lead to undisciplined spending

Pros Explained

  • Low-maintenance form of budgeting: With a pay-yourself-first budget, you don’t have to worry about whether you’re spending too much on housing or if it’s okay to splurge on popcorn at the movie theater. You can spend the rest of your paycheck however you’d like once you pay yourself first.
  • Prioritizes saving first: The whole point of a budget is to help you reach your savings goals and live your best life. With the pay-yourself-first budget, you make sure you’re hitting those goals right from the get-go.
  • Automates your budget: One of the golden rules of a pay-yourself-first budget is to set up automatic transfers for all your savings goals so money gets moved out of your checking account the second you get paid. Out of sight, out of mind.

Cons Explained

  • Not ideal if you’re living paycheck-to-paycheck: You may not have enough wiggle room in your budget to comfortably pay yourself first without overdrafting or taking on debt. In this instance, consider using an envelope or zero-based budget first, then switching over to a pay-yourself-first budget once you have some breathing room in your budget to save.
  • Could lead to undisciplined spending: When you pay yourself first and spend the rest however you like, you may be missing out on opportunities to refine your spending and reach your savings goals even faster.

Key Takeaways

  • A pay-yourself-first budget is a budgeting method where you set aside money for your savings goals first, then use the rest of your paycheck as you wish.
  • A pay-yourself-first budget is easier than other types of budgets because you don’t have to spend time tracking your expenses. As long as you’re hitting your savings goals and not taking on more debt, you’re good.
  • A pay-yourself-first budget works best for those who already have a good handle on their spending and saving. It could be ineffective if you’re at risk of account overdrafts or running up credit card balances.
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  1. IRS. "Retirement Topics: IRA Contribution Limits."

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