How to Pay Yourself First (Reverse Budgeting)

It’s finally time to pay yourself first, but can we be honest, what exactly does that mean?

Maybe you’re the person who constantly finds themselves scraping the bottom of the barrel for a few dollars just to get a few groceries.

You find yourself asking where all of your money went and promise to never do this to yourself again… then around 25th day of the next month you’re in the same position.

If you’re someone who makes a decent living and works hard (Like most adults) you might be a bit perplexed as to where all of your money is going.

Sure there might be the scenario where someone doesn’t make enough money, but typically it boils down to controlling the money you do have – instead of letting it control you.

In other words, it’s time to learn how to reverse budget and pay yourself first.

See also, 21 Ways to Make $500 Fast

Do you need to pay yourself first?

Real quick, answer these questions in your head:

  1. You feel like you have enough money at the end of each month?
  2. Do you make a good amount of money & never seem confused as to where it goes?
  3. Do you have 3-6 months in an emergency fund?
  4. Is at least 15% of your income going to retirement, savings, or debt pay off?
  5. Can you honestly say you feel great about your progress towards your financial goals?

If you answered yes to all 5, you’re in a good position when it comes to reverse budgeting and handling your money. However, on the other side of the coin – if you said “No” to 3 or more you might want to implement the pay yourself first strategy ASAP.

In the article “5 Rules to Stop Making Money Complicated” one of the rules is to dumb down money. It isn’t very hard, you just have to make your sure have a plan and you’re honest with your finances. The simplest way to do this is to reverse the budget.

How to pay yourself first 101.

The premise behind paying yourself first:

Pay your future, before paying bills and spending.

Also known as reverse budgeting, the idea is actually really simple to implement. The best thing about the pay yourself first strategy is you are able to remove the budget killer… human behavior.

By figuring out a number monthly to pay yourself (Money to use towards debt, savings, or investments) as long as you stick to it, you are able to avoid the temptation to spend.

Here is how it works in a nutshell:

Step 1: Figure out your monthly net income (What your bring home each month)

Step 2: Figure out how much your fixed expenses (Use this list for fixed expenses)

Step 3: Subtract your fixed expense total from your monthly income. (Example $4,000 take home subtract $2,500 bills = $1,500 leftover)

Step 4: Determine how much you will contribute towards savings, debt or investments each month (then spend money on other things).

Reverse budgeting example:

Using median family income and expenditure numbers from  the 2014 Bureau of Labor and Statistics, here is a scenario of what the “PYF” strategy would look like for a couple with no kids:

Monthly Net Income$6,500
Fixed Expenses (Bills, housing, debt, food)$4,000

In this scenario, this fictional couple would have $2,500 each month leftover to pay themselves first, then spend.

Always erring on the conservative side, this fictional couple could use $1,800 to pay off debt, save, or invest, they use the other $500 for spending.

The simple way to do this, is to take the amount of $1,800 and divide by the number of checks this couple gets each month: $1,800 / 4 = $450 per check.


Need to pay off debt? Need to save for the future? Need to invest into retirement?

Pay yourself will promote accountability to yourself. By paying yourself first, you in a sense, remove the possibility of temptation or impulse spending. The approach requires some discipline, but with correct budgeting the idea is almost seamless.

You should figure out what percentage of your income you can allocate to your future and use the pay yourself first concept.

The Advantage?

The advantage of paying yourself first, or the PYF Strategy, is the idea of security. Security for your future. It is the same concept that has allowed my wife and I to knock out our car loans, my student loans, and closing in on 6 figures of her student loans.

Keep in mind, with lots of debt and minimal savings, financial stress can lead to larger issues. Like I recently wrote about in my Don’t Compare Yourself post, when posed with the question of whether someone would rather have financial security or “stuff” most will choose security.

Yet somehow we still have a population of working class adults who live paycheck paycheck (87%) and more than 50% who don’t have $1,000 to their name.

Nest eggs are great in case of emergencies, car maintenance, appliance failure, and so on. With the expectation that at a millennial will need 1.8 million in order to comfortably retire, most people (myself included) should have implemented the PYF strategy about 10 years ago.

Pay yourself first would mean that every time this couple received a paycheck they took $500 from each check FIRST and paid off debt, saved or invested. Non negotiable. This is actually similar to what Lauren and I do, just a little different.

We live off my teacher salary and we use 100% of her DPT salary to pay off student loans. It’s how we have been able to pay off $109,000 in debt.

What do you do with all this money?

Now that you have your PYF strategy rolling the next question that pops up is what do you do with it. My go to is paying off debt, but even before that I think just about anyone in the  personal finance industry would say save at least $2,000 an an emergency fund.

I was recently asked about the best place to keep an emergency fund – Ally Bank. It is where we keep our 4 month emergency fund (we want to increase it to 8-12 months soon) because they offer 1.2% interest on it and it takes 3 days to access.

The 3 days thing is actually a pro in my mind – I don’t want to be able to slide money to my checking when I am over budget with ease. Remember, it is an emergency fund not a, “I really need this new jacket fund.”

Once you have your emergency fund, I would tackle debt, save a bigger emergency fund, then it gets fun. Hypothetical, you have no auto debt, no student loan debt, your emergency fund is 12 months deep and you have been paying yourself first for some time, where do you go next?

Well, I wrote a super underrated post here about using extra income and a HELOC to accelerate a mortgage if you own, you can read that here. How awesome would being mortgage-free be?

If you don’t own maybe you save up for a 20-40% down payment.  Or if you would rather invest/save then that is the next step for you. No matter what, you have options and control.

That is the entire point of the pay yourself first strategy. You are taking care of yourself first before you spend.

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