Saving money can often feel like an afterthought. There can sometimes be little to put towards savings after covering rent, bills, groceries, and entertainment. That’s where the “Pay Yourself First” savings method comes in. This budgeting strategy flips the script by prioritizing savings above all else, helping you build wealth and secure your financial future before focusing on day-to-day expenses.
Also called the 80/20 rule, this approach simplifies budgeting into two key steps: save first and spend the rest. Let’s explore how it works and how you can apply it to your finances.
The “Pay Yourself First” savings method is a budgeting strategy that emphasizes saving as the top priority. When you receive your paycheck, you immediately set aside a predetermined portion—commonly 20%—for savings, investments, or debt repayment. The remaining 80% is then used for all other expenses, including housing, utilities, groceries, and discretionary spending. This method ensures that saving becomes a habit and prevents the temptation to spend everything you earn. By treating savings like a mandatory expense, you’re effectively prioritizing your financial goals.
Here’s a step-by-step guide to implementing this method:
Let’s see how this method works with a $4,000 monthly income, saving 20% and living on the remaining 80%.
Category | Amount | Notes |
Savings (20%) | $800 | Prioritized for building wealth and financial goals. |
Emergency Fund | $300 | Create a safety net for unexpected expenses. |
Retirement Fund | $200 | Contribute to RRSP or other retirement accounts. |
Debt Repayment | $300 | Focus on high-interest debt like credit cards or loans. |
Living Expenses (80%) | $3,200 | Everything else—necessities and wants to be combined. |
Rent/Mortgage | $1,500 | Fixed housing cost. |
Utilities & Bills | $350 | Water, electricity, internet, etc. |
Groceries | $500 | Food and daily essentials. |
Gas/Transportation | $200 | Gas, car payments, or public transit. |
Dining Out | $200 | Restaurants, take-out, and coffee shops. |
Entertainment | $200 | Movies, subscriptions, hobbies, etc. |
Shopping & Misc. | $250 | Clothes, gadgets, or other discretionary spending. |
Total | $4,000 | Every dollar has a purpose! |
This method is ideal for individuals who want a straightforward way to prioritize savings without worrying about complex budgeting systems. It’s particularly effective for those with consistent income and a strong commitment to achieving long-term financial goals. If you’ve struggled to save, this method can help you develop the habit by making it automatic and non-negotiable.
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