Pay yourself first: meaning, and how to do it on payday

What it means

The CFPB's guide to building an emergency fund says to pay yourself first by putting a portion of each paycheck automatically into savings. The key words are portion and automatically. You pick a share, and a standing transfer moves it, so you do not have to decide again each payday.

The reason it works is order. If saving is what is left at the end of the month, there is often nothing left. If it moves first, the spending adjusts to the rest.

How to set it up

Two ways, both in the CFPB guide. Set up recurring transfers through your bank or credit union, on the day you are paid. Or ask your employer if you can split your paycheck between checking and savings, so part never lands in checking at all.

Keep an eye on your balance, as the CFPB reminds readers, so a transfer does not cause an overdraft fee. If you are paid biweekly, set the transfer for each payday, not once a month.

Pay yourself first as a couple

Each person can pay themselves first from their own paycheck, and the household can pay itself first too: a transfer on each payday into a shared bills account and another into a shared goal, such as a sinking fund. The guide to splitting bills by income covers how to set each person's share.

Agree on the percent, not just the dollar amount, so a raise raises the saving too.

A worked example: $200 on each biweekly payday

• Take-home per paycheck: about $2,093.
• Automatic transfer to savings: $200.
• Share of the paycheck: $200 / $2,093 = 9.6%.
• Per year: $200 x 26 = $5,200.
• Left to spend and pay bills from each paycheck: $2,093 - $200 = $1,893.