To take control of your finances, start by examining your income. A popular money management technique is “paying yourself first” (PYF), which involves dividing your paycheck to prioritize your goals. Many Americans adopt PYF to pay off debt, save money, and achieve financial objectives.
PYF is a budgeting strategy that ensures you reach your financial goals by putting money aside from each paycheck and using the rest for your daily expenses. This method helps you meet your financial objectives while still allowing you to have some fun money, which is a crucial part of making a budget that you can stick to.
However, not all budgeting methods work for everyone, including this one. Individuals with variable incomes, such as business owners, may need help setting aside money during leaner months and may not consider increasing their savings when they earn more.
If you want to learn more about the effective PYF method to divide your paycheck, continue reading to obtain all the information you need.

Understanding the Pay Yourself First Budget System

The Pay Yourself First (PYF) budgeting system is a simple but effective way to manage your finances. The idea is to divide your paycheck as soon as you receive it, putting aside a portion of your earnings for your financial goals and then allocating the remaining amount for your needs and wants.

There are two primary ways to implement the PYF method: the 80/20 budget and the 50/30/20 budget.

The 80/20 Budget

With the 80/20 rule, you allocate 20% of your paycheck towards financial goals like debt repayment, retirement savings, or building an emergency fund, and use the remaining 80% for your expenses like rent, groceries, transportation, and entertainment. This method is ideal for those who are just starting with budgeting or those who want to save money while paying off debt.

The 50/30/20 Budget

The 50/30/20 budget is a more detailed version of the PYF method. Here, you divide your paycheck using the following percentages:

• 50% on needs (like mortgage and groceries)
• 30% on wants (like travel and dining out)
• 20% on savings (like retirement or emergency funds).

This method is ideal for busy households as it ensures you have enough allocated towards your needs while also preventing overspending on wants. The 50/30/20 rule can also help you avoid future financial obligations where you might be spending too much on your “needs”. For instance, by running the numbers, you may decide against taking on a mortgage that is too large or a car payment you can’t afford.

The 50/30/20 method is an excellent choice for young families who incur debt like car payments and mortgages and want to ensure they aren’t overspending on their needs.

Benefits of Paying Yourself First

Paying yourself first is a budgeting method that has numerous advantages. One of the most significant benefits is that it guarantees you will save money over time. By allocating funds to your savings or investment brokerage account as soon as you receive your paycheck, you are more likely to save money consistently each month. This regular saving will compound over time and grow into a substantial sum.
Another advantage of paying yourself first is that it is simple to implement. By setting up automatic deposits to your savings or investment accounts, you can make sure that you save a portion of your paycheck each month without any effort. As long as you receive your pay regularly, you can automate transferring funds from one account to another.
Lastly, this budgeting method is flexible. Once you become comfortable with it, you can apply it to different financial goals, such as paying off debt, buying a house, or planning an early retirement. No matter what your financial objectives are, paying yourself first can help you achieve them.

How to Create a Pay Yourself First Budget

While many people have successfully used the Pay Yourself First (PYF) budget to reach their financial goals, it may seem challenging to implement it in your own life. However, setting up this budget is simple.

To begin, decide which of the two methods you prefer: 50/30/20 or 80/20. Remember, the 80/20 method allocates 80% of your paycheck to your needs and wants, while the remaining 20% goes toward savings. On the other hand, the 50/30/20 method divides your paycheck into 50% for your needs, 30% for your wants, and 20% for savings.

What the 80/20 Budget Looks Like

If you choose the 80/20 method, start by allocating 20% of your income to your financial goals. You can divide that 20% however you prefer. For example, you can allocate 15% of your paycheck to your retirement savings and 5% to your emergency fund.

If you receive a bimonthly paycheck of $2,500, you would allocate:

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

After allocating these amounts, you can use the remaining 80% ($2,000 in this case) on your needs and wants, however you choose. To implement this budget, set up automatic contributions to your retirement savings and emergency fund. This will ensure that your savings are deducted automatically from your checking account when your paycheck arrives.

What the 50/30/20 Budget Looks Like

Using the 50/30/20 method is a bit more complicated, but still simple. If you receive a bimonthly paycheck of $2,500, you would allocate:

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

To save automatically, set up transfers from your checking account to your savings or brokerage accounts. To ensure that your needs and wants are balanced, categorize your expenses. Needs include car payments, car insurance and maintenance, gasoline and transit passes, cell phone bills, rent and mortgage payments, groceries, insurance, and utilities. Wants include entertainment, subscription streaming services, gym memberships, and shopping.

If your expenses and spending don’t match the 30/50 division suggested, adjust your budget to bring it into balance.

The Bottom Line

A successful financial future isn’t merely about choosing the right stocks or investing in a promising cryptocurrency. These tactics certainly have the potential to increase your net worth, but it’s even more critical to have a solid financial foundation.
One of the most fundamental aspects of financial management is establishing a consistent savings routine. Paying yourself first or splitting your paycheck is an easy and effective way to begin saving money. Other budgeting methods are available, such as zero-based budgeting and the envelope method. However, paying yourself first is a highly flexible strategy that prioritizes your financial goals while allowing greater flexibility.