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Published March 10, 2023
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Pay Yourself First: Reverse Budgeting Explained

With the pay-yourself-first budget, you put money towards savings goals like retirement before living expenses.

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Most budgets are built around expenses like rent, groceries, and utilitie and discretionary spending, like entertainment. The pay-yourself-first method flips that approach on its head and prioritises using your income for savings ahead of anything else. 

While reverse budgeting can be effective, it’s not for everyone.

What does it mean to ‘pay yourself first’?

‘Pay yourself first’ is a reverse budgeting strategy where you build your spending plan around savings goals, such as retirement, instead of focusing on fixed and variable expenses. This puts savings first, but not at the expense of necessary expenses like housing, utilities and insurance.

How ‘pay yourself first’ budgeting works

Use these steps to set up your own reverse budget.

Step 1: Assess your spending

To make this budget successful, you’ll have to prepare and start tracking monthly expenses. Start by pulling up your bank and credit card statements. Then, think of a reasonable amount you could save each month without risking overdrafts. 

Step 2: Determine how much to pay yourself

Pinpoint a realistic amount using the 50/30/20 approach. This method allocates 20% of your monthly income to savings and debt repayment, 50% to necessities and 30% to wants.

With a $3,400 monthly income, for example, you’d reserve no more than $680 for savings and debt repayment, $1,700 for needs and $1,020 for wants.

Step 3: Identify your savings goals

Make a list of your short-term and long-term savings goals. Saving for retirement and building an emergency fund should be your first priorities, followed by other goals, like travel, new appliances, or a house.

You can contribute a small amount to each goal or pick a couple to focus on first. Using the 50/30/20 guideline, decide how much you need to save to reach those goals and how much you can afford to tuck away each month.

So let’s say your monthly income is $3,400, for example, and each month you want to save $150 for your emergency fund, $200 for retirement and $100 for a new motorcycle. Set aside that $450 first, then use the remaining $2,950 toward other costs, such as rent, groceries, utility bills and personal loan payments.

🤓 Nerdy Tip

The 20% you allocate to the savings and debt repayment category includes an emergency fund and retirement contributions. Savings goals, such as travel, a wedding or that new motorcycle, would count toward your needs or wants.

Step 4: Adjust as needed

Ideally, you have enough money coming in to cover your needs, wants and financial goals. But if you find yourself coming up short, look for ways to scale back. That might mean focusing on one savings goal at a time or finding ways to trim expenses from your needs and wants categories, or all of the above. You can also explore supplementing your income with side gigs.

The pros and cons of paying yourself first


  • Minimal effort. The pay-yourself-first budgeting method is low maintenance compared with others, such as zero-based budgeting. It doesn’t require categorising every expense or keeping a detailed record of your spending.
  • Allows you to zoom out. Reverse budgeting can also help you focus on the big picture and reduce impulsive purchases. When people save first, they have less money to spend and tend to use the remainder on things they need or value.
  • It can be automated. If you have a superannuation account, set up contributions from your pre-tax salary. You can also use an app or log onto your bank’s website to arrange automatic transfers from your everyday account to your savings account. You could even set up separate savings accounts for each goal you’re trying to reach.


  • Prioritising savings over other goals may not always be in your best financial interest. For example, if you have toxic debt — such as a high-interest credit card balance — we recommend tackling that before saving up for a holiday or a new car. 

Ready, set, save

Paying yourself first is a great option if you prefer a hands-off budgeting system or don’t want to feel like you’re budgeting. Remember to automate your savings for an easier experience.

If you need more structure, consider a more involved budgeting method such as the envelope system, which simultaneously portions out your entire income toward all your expenses.

If you’re in the United States, read this article on the NerdWallet US site.


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