When it comes to money management, a standard personal finance strategy that people adopt is to pay all necessary expenses first. These include things like bills, pending debt repayments, etc. Then, one can make other purchases with the leftover amount and save the rest in their savings account.

But what if your initial income amount itself is low? If you pay off your dues first and prioritize saving money as an afterthought, you won’t have much left for the emergency fund. The 'Pay Yourself First' strategy is suitable in this scenario.

Let’s discover why this is one of the best ways to save money on a tight budget.

What is the ‘Pay Yourself First’ Strategy?

The 'Pay Yourself First' strategy is a type of budgeting method that people use to save money as their first step. Then, they focus on other recurring expenses like pending electric bill payments, credit card payments, and miscellaneous purchases.

With the 'Pay Yourself First' method, you are essentially saving small portions of your income first to grow your financial well-being over time. The foundation of this strategy revolves around one’s savings goal for retirement, emergency savings, etc.

How does it work?

Adopting the 'Pay Yourself First' approach will help you control your spending habits better when you have a tight budget. You can activate automatic transfers of specific amounts into another savings or investment account directly from your checking account. Plan how much to save each month based on your savings goals. Then, with the rest of your money, you can complete other expenses, like bill payments to utility service providers, streaming services, etc.

However, if you have outstanding debt payments to complete, you should calculate how much to pay yourself first around that. If you fail to make these payments, your credit score will drop, and you might incur late fees.

Important savings goals to consider

It is best to consider your savings goals beforehand when planning to use the 'Pay Yourself First' method for budgeting. Typically, people have certain financial goals in mind in this context. Here are some of these examples for you.

Emergency Fund

You should save a portion of your income in your emergency fund each month. This will prove useful in sudden emergencies when you are strapped for cash. For example, if you lose your job suddenly or experience a medical emergency, you can take some money from the emergency fund for them.

Having separate funds dedicated toward such unexpected expenses will allow you to carry out your everyday expenses without worry. Setting up a specific savings account for your emergency fund is best.

Also, you can set a specific limit to this account. Contact your employer and set up an automatic transfer method of payment for your paychecks. For example, they can use direct deposit to send your earnings to your bank accounts.

Retirement

As per reports from the Federal Reserve, three-fourths of U.S. citizens focus on retirement savings. However, only 40% of Americans are sure that they are meeting their retirement goals among these counts. However, if you use the 'Pay Yourself First' approach to budget your money, you can save up your retirement account over time.

You can opt for retirement savings accounts like 401(k) or tax-advantaged Roth IRAs to save parts of your income.

Potential Big Purchases

Some people use this strategy to budget their money for upcoming major purchases. Examples include college tuition, a car, or funding for a dream vacation. Generally, saving money for this purchase will take time, so the 'Pay Yourself First' method works well here. It is best to set a goal amount to target and then break it down into smaller goals. Then, save the decided amount, like $30 each paycheck, into your dedicated savings account.

House Down Payment

When buying a new home, you still have to pay some down payment even if you take out a mortgage loan. This amount is typically a relatively large sum. So, you can utilize the 'Pay Yourself First' strategy for this savings goal.

Debt Repayment

In some cases, people save up their money with the intention of paying off their existing debt first. You can use this strategy for the same financial goal.

Set aside a portion from your paycheck for your due loan payments as your first priority. Use the rest for other everyday expenses and savings goals.

Steps to Save Money with the 'Paying Yourself First' Strategy

If you want to start saving money first from now on, you need to follow a specific sequence of actions. That way, you can avoid spending cash on short-term expenses and focus entirely on long-term savings. Here are the steps you need to take:

Measure how much you have:

Firstly, you should assess how much you receive in your paycheck per month. If you have more than one source of income, calculate them into your total income. Moreover, review your savings account records and bank statements to see your common recurring expenses. Consider how much you pay for basic living expenses and how much for additional luxuries. Then, you can shape your priority expenses list.

Set your savings goal:

Consider your main money goals in the long-term sense. For example, let's say you plan to pay for student loan payments for your child later. Besides that, you want to save money for retirement and even pay off your home loan. You should take time to set your goals, including the desired timeline for savings. Then, you can easily measure how much you need to save each month and your expected budget for monthly expenses like grocery shopping, utilities, etc.

Select the mode:

Next, review the best type of account to save your funds. The best option is a high-yield savings account because the money added to this savings account type increases over time. Set up automatic transfers for smooth and timely savings.

Check and adjust occasionally:

In case your savings goal changes later, you should adjust your budget accordingly. Plus, keep note of new events that affect your finances, like taking up a new loan or getting a job promotion. You should adjust your 'Pay Yourself First' plan periodically based on your current financial situation.

Ways To Budget with the ‘Pay Yourself First’ Method

With a smaller income, it is especially important for you to plan your budget carefully. There are some money-saving tips you can use while trying this budgeting approach perfectly suited for limited budgets.

Prioritize automated savings transfers

You should check out accounts with the automatic transfer benefit since it will simplify your budgeting process better. When you have a tight budget, your attention will naturally go towards completing necessary living expenses when you get a paycheck.

Prepare your account to transfer money instantly to another savings account per month. You can even set a small amount for this transfer, like $50 from your paycheck. This will continue in the background even if you sometimes do not consciously focus on savings.

Use multiple savings vehicles

Creating an organized savings plan will help you immensely. You can use three different savings vehicles for your varying financial goals for the best results. Keep one checking account as your primary account to which your employers will transfer direct deposits per month. You can access this account for your variable expenses, like paying for your cell phone plan, transportation costs, etc.

Keep a high-yield savings account as your second account, preferably in another bank. You can set up automated transfers from your primary account to this account after each paycheck- this will work as your emergency fund.

Then, make a third account that you will use for additional fixed costs, like monthly rent money or loan payments. You can also set automated transfers to respective lenders from this account for recurring payments.

Consider savings as a necessary target

When budgeting, the best method is categorizing your expenses in terms of necessity. For example, utility bills are the primary costs, but entertainment-related expenses like eating out at restaurants are a luxury. When you have a limited budget, you should ideally prioritize the non-negotiable costs first. Now, if you consider "savings" as a type of "necessary expense", you will have an easier time following the pay yourself first strategy.

“Prioritize setting aside a fixed percentage of your income before allocating funds to other expenses," says Aaron Winston, strategy director at Express Legal Funding. "Automate this process by establishing an automatic transfer to your savings account right after receiving your paycheck.

“By treating savings as a non-negotiable expense, you ensure you build a consistent and disciplined approach to saving, regardless of fluctuations in your budget. This strategy fosters financial discipline and gradually strengthens your financial security, even in challenging economic circumstances.”

Use personal finance apps

You can use personal finance apps for simpler money management. Many such apps are available today with advanced features, like expense tracking, budget calendar settings, automated transfers, comprehensive dashboards, etc. With these systems, you can stay better organized with your realistic budgeting plan.

“Set reminders, create automated transfers, and receive notifications to encourage regular savings," says Roy Lau, co-founder of 28 Mortgage. "For example, using apps like Mint, PocketGuard, or YNAB can help you visualize your spending, identify areas to cut back, and track progress toward your saving goals."

Start small and turn it into a habit

When you have a limited budget and multiple fixed or variable expenses to work around, it can become challenging to stick to a set savings plan. So, when using this budgeting strategy, you should only allocate a small percentage of your income for savings.

“Start with 2-5% and raise it as your budget allows. We approach technical solutions carefully, like this progressive technique”, suggests Matthew O’Sullivan, CEO of Subsidence Ltd. “Like our repairs, automate your savings. Automatically move payday funds from checking to savings. This reduces spending and makes saving a habit, like our streamlined processes.”

Is the ‘Pay Yourself First’ method a good choice?

Reports show that most Americans do not follow through with their emergency savings goals. In fact, a study shows that 32% of American households had less emergency savings than what they started with at the beginning of 2023.

As the name suggests, the paying yourself first strategy revolves entirely around a "savings first" mindset. However, the cost of living in the U.S. is high on average, e.g., increased healthcare costs. Plus, due to economic factors like inflation, certain costs like real estate prices are also high.

People in low to medium-income households find it hard to focus on savings first with other expenses in mind. So, it is reasonable to see why this budgeting approach is not heavily popular. However, with specific planning and the help of expert financial planners, it is not impossible.

For example, if you must take care of monthly payments towards personal loans, credit cards, or mortgage loans, pay that off first. You can use techniques like a debt consolidation program to pay off your existing debt with a revised repayment plan. Rearrange your budget around this and set aside a portion towards your savings account first before making other expenses. Commit to the savings plan you prepared and follow your budget carefully to see long-term benefits.