Pay yourself first

The "yourself" in the name is the saver. The landlord, the utility and the grocer are all paid from a paycheck; paying yourself first means the transfer to savings is the first payment out of it, on the day it lands, and everyone else is paid from what remains. The saving happens before the month has a chance to spend it, which is the whole mechanism: a transfer decided at month end is whatever is left, and what is left is usually nothing. It is also called reverse budgeting, because a category budget decides the spending and saves the remainder, and this decides the saving and spends the remainder.

In a sentence

• "We pay ourselves first: $660 leaves for savings and the loan the morning the paycheck lands."
• "Pay yourself first means the transfer is dated for payday, not for whatever is left on the 30th."
• "A category budget plans the spending and saves the rest. Pay yourself first plans the saving and spends the rest."

How it works

1. Decide the amounts. The emergency fund transfer, the extra debt payment, and the monthly share of annual bills and repairs together are the "pay yourself" amount. A retirement contribution taken from the paycheck is the same idea run by payroll.
2. Put every fixed bill on autopay from checking, dated on or after the paycheck that covers it.
3. Set the transfers to run automatically on payday, at the bank, to a separate savings account and to the loan. A transfer that waits to be moved by hand is skipped the payday the account looks low.
4. Compute the remainder once: take-home pay minus the transfers minus the bills. Divided by the days in the month, it is the rate the household lives at.
5. Spend the remainder without categories, and when it is gone, stop. The method gives no warning before that point; the remainder's size is the only guard.
6. Raise the transfer a step after a few months in which the remainder ends above zero.

Remainder = take-home pay − payday transfers − fixed bills

An example

Take-home pay is $4,400 a month, in two paychecks.

The $660 is 15% of take-home pay, sent as $330 from each paycheck, and the $1,440 is $48 a day across a 30-day month, the one number the household watches. The month a $500 car repair lands, it is paid from the set-aside, which has been collecting $160 a month, and the remainder is untouched. Without the set-aside, the same repair comes out of the remainder and leaves $940 for a month of groceries, fuel and everything else, which is where the method starts to fail.

Why it matters

The order of the payments decides whether saving happens. A savings amount set after the flexible categories are filled is the first thing the month runs out of, because the checking balance reads as available all month and is spent down to whatever it holds. Moving the transfer to payday reverses that: the balance the household sees all month already has the saving taken out, and spending fits itself to the remainder the way it would have fit itself to the full paycheck. The method's limits are the other side of its simplicity. It cannot say where the remainder went, it gives no mid-month warning, and it fails when the remainder is too small to absorb one irregular expense, below about a quarter of take-home pay, or when the remainder is spent on a credit card that next month's remainder then pays.

Pay yourself first versus zero-based budgeting

Pay yourself first makes three decisions once and leaves the remainder untracked; zero-based budgeting assigns every dollar of the remainder to a category too, every month. Both put saving and debt payments ahead of the variable spending, and a zero-based month with the goals assigned first is paying itself first. The difference is what happens after: the zero-based household knows where every dollar of the remainder went and spends twenty minutes a month finding out, and the pay-yourself-first household knows only that the saving happened. See Zero-based budgeting.

Common questions

How much should I pay myself first? Start from what the remainder can bear rather than from a percentage. Take-home pay minus the bills is the ceiling, and the transfer is the part of that the household can give up without running out of remainder by the 20th; raise it by a step every few months when the month ends above zero. Rules of thumb put saving at 10% to 20% of take-home pay. See How to calculate your savings rate.

Is paying yourself first the same as an emergency fund transfer? The emergency fund transfer is one of the payments, usually the first. Paying yourself first is the broader habit of putting every saving and debt goal ahead of spending, and the set-aside for irregular expenses is the part most often left out. See Emergency fund.

Does a 401(k) contribution count as paying yourself first? Yes. It is the method run by the employer: the contribution leaves before the pay arrives, and the household lives on what is left. Count it toward the saving when you compare with a rule of thumb.

What if my income is irregular? Make the transfer a percentage of each paycheck rather than a fixed amount, so a small paycheck sends less, and keep a floor below which it pauses. The method suits irregular pay because it never plans on income that has not arrived.

Can I pay myself first and keep a category budget? Yes, and most households that keep the method for more than a year do. The payday transfer stays in front, and two or three categories cover the largest variable expenses; the rest of the remainder stays untracked.

Go deeper

• Pay-yourself-first budgeting, and when it beats a category budget sets the method up, runs a worked month and the car-repair month that tests it, and says when a category budget wins.
• How to calculate your savings rate turns the payday transfers, the retirement contribution and the debt principal into one rate to compare with your own last year.
• The Savings goal calculator works out what to set aside each month to reach a savings goal by a date, or how long a goal takes at the amount you can save now, with the account's interest counted along the way.

Where it shows up in Zypper

Zypper keeps the payday transfers out of your spending and shows the remainder. When money moves between your own accounts, both sides show up as transactions, and Zypper links them automatically as one transfer, not income and spending, so the transfer to savings never distorts your cash flow or lands in a category; the savings account's balance counts toward your net worth. Bills are identified as recurring groups from your transactions and count as money already spoken for in the month they are due, and Left to budget on the budget page, your expected income minus everything budgeted for spending, is the room the plan leaves for the transfer. See Splitting and linking transactions and Creating your budget for the details, or get started with Zypper to see your own remainder.