How to Use the Pay Yourself First Budget Model (With Examples)

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If you’re interested in taking control of your money, a great place to start is by looking at your income. You can divide your salary each month to prioritize your goals. This is a money management method called “pay yourself first” (or PYF). Thousands of Americans use it to pay off debt, save money, and reach their financial goals.

Paying yourself first is a budgeting strategy that helps you reach your financial goals by setting aside money from each paycheck and using what’s left over for your daily and leisure expenses. This method ensures that you reach your financial goals and make fun money, an essential part of making a budget you can stick to.

That said, there’s no one budgeting method that works for everyone, and that’s true for this one. Business owners with variable income, for example, may find it difficult to put money into savings during lower earning months and may not think to increase their savings during higher earning months.

If you’re interested in this tried-and-true method of splitting your paycheck, read on to find out everything you need to know about your paycheck first.

The short version

  • Paying Yourself First is a budgeting method that focuses on prioritizing savings goals through automation.
  • There are several ways to pay yourself first, such as splitting your money 80/20 or 50/30/20.
  • Setting up a paycheck budget for yourself includes automating your paycheck to deposit into your online brokerage or savings accounts.

How the Pay Yourself First budget works

PYF budgeting involves splitting your paycheck as soon as you receive it and sending a portion of that money toward your financial goals (like saving for a down payment or paying off debt) and then dividing the rest among needs and wants. There are two main ways to split your salary using the PYF method.

80/20 budget

Budgeters who use the 80/20 rule save 20% of your salary for financial goals like retirement, paying down debt or building an emergency fund and the remaining 80% of your salary for expenses like transportation, rent, groceries and entertainment.

The 80/20 pay-yourself-first method is a flexible strategy and ideal for first-time budgeters or those who want to save but also expect to devote a large portion of their income to paying down debt.

30/50/20 Budget

While the 80/20 budgeting method ensures that you save at least 20% of your paycheck, you can split your paycheck even further using the 50/30/20 method to ensure your budget is even more balanced .

Using this method, you will divide your salary by the following percentages:

  • 50% of needs (like paying the mortgage and groceries)
  • 30% in wishes (like traveling and eating out)
  • 20% savings (such as emergency or retirement savings)

The 50/30/20 method is ideal for busy households because it prevents you from spending too much on your ‘wants’ and ensures that you have enough money allocated to your ‘needs’.

Alternatively, the 50/30/20 rule can help you gain insight and avoid future financial obligations where you might overspend on your “needs.” For example, just by running the numbers, you can decide not to take out a mortgage that’s too big or a car payment you can’t afford.

The 50/30/20 method of splitting your paycheck is a good option for young families who may incur debt like car and mortgage payments and want to make sure they don’t spend too much on necessities.

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Benefits of getting paid first

No matter how you slice it, there are numerous benefits to the PYF budgeting method. First, a problem that most investors face is making sure they invest consistently. When you pay yourself first, you’re guaranteed to build a nest egg over time.

Paying yourself first will get your money where it needs to go as soon as you receive your salary, instead of waiting to see what’s left at the end of each month. That way, you’re guaranteed to save money every month, and over time, that money will snowball into a significant amount.

Secondly, paying yourself first is easy. By setting up automatic deposits into your investment brokerage and savings accounts, paying yourself first takes no effort from month to month. Whenever your paycheck is deposited at predictable intervals, you can set up an automatic withdrawal from your savings or investment accounts.

Finally, this method is adaptable. Once you master it, you can use the strategy to adapt to whatever your next milestones are. Whether it’s paying off debt, early retirement, or buying your dream home, you’ll make sure you do it by paying yourself first.

How to create a first payment quote

Although the theory of PYF budgeting is sound and thousands of people have used it to achieve their financial goals, it can be difficult to see how you can incorporate it into your own life. How do you plan to use this method to budget your money? Here’s exactly how it works.

First, decide whether you want to use the 80/20 method or the 50/30/20 method. Remember:

80/20: 80% of your salary goes to needs and wants, and 20% goes to savings.

30/50/20: 50% of your salary goes to your needs, 30% to your wants and 20% to savings.

What does an 80/20 budget look like?

Using the 80/20 method starts with designating 20% ​​of your income toward financial goals. You can split that 20% however you want. For example, you might put 15% of your salary toward retirement savings and 5% toward building your emergency fund.

This means that if you receive a bi-monthly pay check of $2,500, you can expect to allocate:

  • $2,500 x 15% = $375 for retirement savings
  • $2,500 x 5% = $125 for emergency fund

Once you have that money allocated, you can comfortably spend the remaining 80% (in this case, $2,000) on your wants and needs, at your discretion.

To put this budget into practice, you’ll need to set up an automatic contribution to both your retirement savings and your emergency fund. That way, when your paycheck hits your account, your savings are automatically removed from your checking account. The rest is yours to spend.

What a 50/30/20 budget looks like

Choosing the 50/30/20 method to split your salary is a bit more complicated, but still very simple.

Using the example above, if you receive a bi-monthly paycheck of $2,500, your allocations will be as follows:

  • savings: $2,500 x 20% = $500
  • Needs: $2,500 x 50% = $1,250
  • Flight: $2,500 x 30% = $750

Again, you can save on autopilot by setting up automatic transfers from your checking to your savings or brokerage accounts. To make sure your needs and wants are in balance, you’ll need to count your expenses and determine what your needs and wants are.

Needs include:

  • Car payments
  • Car insurance and maintenance
  • Gasoline and traffic passes
  • Mobile phone bills
  • Rent and mortgage payments
  • Edibles
  • insurance
  • utilities

Desires include:

  • entertainment
  • Subscription streaming services
  • Gym memberships
  • purchases

If you add up your expenses and your expenses and find that your wants and needs aren’t in balance with the suggested 30/50 split, you can tweak your budget to balance it out.

The bottom line

A prosperous financial future is not about picking the right stocks or riding a cryptocurrency to the moon. While these aspects of financial management can help you increase your net worth, it is much more important to have a solid foundation.

You can’t get much more basic than establishing a solid savings routine by paying yourself first. Paying yourself first or splitting your salary allows you to start saving painlessly. There are many other ways to budget, from zero-based budgeting to the envelope method. Still, it’s a super flexible strategy that prioritizes your financial goals while still giving you plenty of leeway.

Now that’s what we call a win-win.

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