The pay yourself first budget: What is it, and how can it work for you

Whatever your savings goals, getting intentional with your money can help you reach those goals faster. In context, Canadians trying to buy a home would first want to figure out how much they need to save for a down payment, then plan to start stowing away whatever that figure may be. Additionally, they must determine which type of account (or combination of accounts) they might utilize to reach the goal. Should they save or invest? It all starts with building a savings habit and prioritizing your future financial goals.

How to implement a pay yourself first budget

To follow this method, you first need to understand the complete picture of your finances. How much do you make? Does your income fluctuate, or is it stable? How much are your fixed and variable expenses, and how much disposable income should you have left over? Once you complete a financial assessment, decide on the amount you can reasonably save without going over budget. Doing this calculation will prevent you from having to dip back into your savings because you overspent.

After figuring out how much you can safely save, set up automated transfers into the appropriate accounts right when you get paid. Moving this money earmarked for savings out of your chequing account is essential. A high-interest savings or investment account is a great place to consider putting your money based on your financial goals.

What are the advantages of a pay yourself first budget?

Reach your financial goals faster

Utilizing a pay yourself first approach can help you get out of debt, save for a down payment and build your retirement savings faster because you are focused on the future and adapting your budget accordingly.

Build financial discipline

When you make saving money a regular practice, it builds your financial discipline and resilience. Creating a habit of paying yourself first can help you develop the skills to build long-term wealth.

Prioritize your future

Paying yourself first places precedence on your future self over your present, helping you build savings for the long term. It doesn't matter whether your goal is a fully funded retirement or a vacation that doesn't put you into debt. You are thinking beyond the present andd how better money management can help get you there.

How does the pay yourself first budget compare to other methods?

It is possible to pair up the pay yourself first budget approach with many other budgeting styles. This approach focuses on building the habit of putting away savings first when you get paid. You are removing the temptation to spend the money sitting in a bank account and unintentionally overspending.

Implementing a pay yourself first strategy is possible when using a 50-30-20 budgeting style. Put that 20% earmarked toward your savings into a savings or investing account before spending 30% on wants.

If you're using a zero-based budget, account for the amount you want to save first. Then, ensure you transfer savings from your account through automated or manual transfers. Ensure this happens when you get paid before spending on other things.

If you follow a cash envelope budget, it can also work. Transfer your savings to a high-interest savings or investing account before withdrawing cash.

The bottom line

What does it mean to pay yourself first? By following this practice you will be prioritizing your stability in the future self and the goals you hope to achieve. You'll be able to accelerate your path to those goals by making paying yourself first an intentional practice. This method can also help you pay more attention to where your money is going while also setting a structure that many need in order to develop better money management skills. Try it out for yourself and see what it can do for you!

Sources

1. StatCan: Current and capital accounts - Households, Canada, quarterly (Aug 30, 2024)