The "Pay Yourself First" Budgeting Method

Don't Want a Line-Item Budget? Try This Fun Budgeting Alternative

Try the Pay Yourself First Budgeting Model

Does "budgeting" sound boring? Perhaps it's because you're doing it wrong. 

When most people think of budgeting, they imagine a strict line-item budget that details the precise amount they’ll spend on groceries, gas, utilities, restaurants and other categories.

This “traditional” budget might prescribe $50/mo for clothes, $100/mo for restaurants and $300/mo for groceries, for example.

But creating and maintaining this type of budget is time-intensive.

 Designing this type of structure -- and then rigorously sticking to the plan -- may sound exciting to some personality types. But it sounds boring to others. 

People who tend to do well with this kind of traditional budget are very detail-oriented, are aggressively paying off debt or saving for a goal, or are otherwise highly motivated to optimize their finances.

Others, however, have a tough time sticking with it.

If you tend to be a big-picture person rather than a detail-oriented person, try this alternative: Pay yourself first, then spend the rest.

What does that mean? First, note how much you bring home. Let’s say you earn $4,000 per month in take-home pay, after taxes.

Then, note your savings goals. You might decide you want to save:

  • $400/mo into an individual retirement account
  • $200/mo towards buying your next car in cash
  • $100/mo towards future car repairs
  • $200/mo towards future home repairs and maintenance
  • $50/mo towards a vacation
  • $50/mo towards future home, auto and health insurance deductibles and co-pays that you might need to pay (you could also conceptualize this as an emergency fund)
  • $200/mo towards saving for college for your kids

Total: $1,200/mo into savings

Subtract this from your income of $4,000.

You’re left with $2,800 per month. Spend this freely, without regard to what category it falls into.

That's all there is to it. It's really that simple. You don't need to worry about what percentage of your money is going towards your rent vs. groceries vs. electricity. Just pull your savings from the top first and foremost. Then relax and live on the rest, without regard to where it's going.

I sometimes refer to this as the "anti-budget," because it feels so antithetical to the traditional budgeting model. But it's equally effective.

The entire point of a budget is to make sure that you're hitting your savings goals. The traditional, line-item budgeting model is a bottom-up approach to making this happen. The "pay yourself first" method is more of a top-down approach. Both are fine. Personal finance is personal, so choose whichever style works best for you.

In the “pay yourself first” budgeting method, you simply pay into your savings first, and then spend the rest. This frees you from the hassle and worry of line-iteming your budget.