How I Transformed Our Budget and Built Savings with the ‘Pay Yourself First’ Strategy

How I use the ‘Pay Yourself First’ strategy in my everyday budgeting to build savings—even when money is tight. Learn how this simple approach works for us.

Does it feel like you’re living pay to pay?

Payday rolls around, and there’s rent or mortgage to pay, bills to cover, and groceries to buy. And then the car needs petrol.

Then kids come home and tell me of a school excursion that needs to be paid… like, tomorrow mum!

Saturday comes, and I need a new work shirt. The kids really need new shoes for Summer – their toes are hanging over the top of last season’s thongs.

And I’m still recovering from when the washing machine stopped working last month.

Before I know it, there’s no money left, and I’m hanging out for the next paycheque.

And savings goals?

They get pushed aside to next payday.

Can you relate to this?

We’ve been through times when building savings has been easy and other times when it’s been near impossible.

But we found a simple strategy to help us save money – even when the budget is super tight – and I’ll share how we do it below.

Disclaimer: This is general information only. In this blog, I share my personal savings and budget stories and what works for us. You should always consult a qualified financial expert when making money decisions (not a random stranger on the internet like me – or even your mate at the pub).

The Golden Rule of Budgeting

You have probably already heard the golden rule of budgeting a dozen times.

Pay yourself first.

Experts at Investopedia describe it as putting money in your own savings before spending money on anything else.

It turns the conventional budgeting wisdom of Income-Expenses=Savings on its head and prioritises savings in the formula:

Income-Savings=Expenses

Successful budgeting means spending what’s left over after you save rather than trying to save what’s left over after you spend.

But…

How do I pay myself first when money is tight and covering day-to-day expenses is a juggling act?

If I’m barely making ends meet, it can feel like a pipe dream.

But I’ve found that even putting away $1 each payday has helped.

When I was asked to attend and report on the Saver Plus program run by The Smith Family – a program helping low-income earners – we played a game where we had to guess how much money was in a 2-litre bottle of Coke, filled with $2. We were all surprised that it added up to a couple of hundred dollars.

Then I heard stories of people’s lives being transformed by the simple act of putting spare change aside. Their stories were inspiring, and I learned a lot about how small changes can make a big difference.

And when I’ve needed new shoes, or the washing machine dies, having money put aside – even if it’s only part of what I need – can reduce debt.

For expert advice on saving and budgeting, visit the government’s MoneySmart website.

Why We Pay Ourselves First, Even if It’s Only $1

The key to building savings is to put aside money regularly and consistently.

The concept is simple, but in practice, not always. Thanks to the cost-of-living crisis, the Q2 2024 Household Savings Rate in Australia is 0.60%. That means on average we’re spending 99.3% of our disposable income in that period. Compare that to 2020, when we saved an all-time high of 24.10%.

Regular and consistent savings are also boring. It’s also not the path to becoming the next billionaire. But if the goal is to build savings, I’ve found over the years that little by little helps.

Maybe you can relate to this scenario?

I’ve got $20 left in the bank, and I don’t feel like cooking. So I think:

‘What the heck, I’ve got the money for takeout, I’ll start saving next week.’

And maybe I rationalise that $20 isn’t going to make a difference anyway, so why not enjoy it now?

And sure, $30 on smashed avo and a latte isn’t going to buy a house in Sydney…or anywhere.

(It took me a year to save up for a good-quality fry pan once.)

But, regularly and consistently putting aside savings, even if it’s only a few dollars out of the $20 (and I just have the coffee – I’m not trying to be Spartan), adds up. It means I might not need to rely on debt, or not as much, if the washing machine dies.

Behavioural economics shows that we rarely think rationally when it comes to money. We spend emotionally and then scramble to rationalise it.

One of my favourite behavioural economists (I never thought I’d write that statement) is Dan Ariely. His book, Dollars and Sense (Amazon affiliate link), explores common ways we irrationally think about money and how it influences our spending and saving habits.

He highlights how emotional and cognitive biases frequently lead us to make decisions that aren’t always in our best financial interest. That insight has helped me when it comes to automating savings – it takes some of the emotion out of decision-making.

So, when we pay ourselves first – especially if we automate it – we eliminate the need for discipline, because we’ve made the decision before payday even arrives.

The Big Question – How Much?

How much should we pay ourselves first?

How long is a piece of string?

According to Nerd Wallet, the 50/30/20 principle recommends allocating 20% of disposable income to savings.

Which is a lot more than 0.6% that Australians can currently afford (see reference above)…on average.

I was 29 when I first started this blog. The GFC had just hit, I lost my job, we had just bought our townhouse at 8.54% interest, and I was pregnant.

To say that money was tight was an understatement.

When I say, ‘we put aside just $1 a fortnight towards savings’, that’s no exaggeration. It doesn’t seem worth it, but seeing our savings grow – even a little bit – helped reinforce a habit. And it meant we were in the habit of saving when we eventually had more to put away.

Reverse Engineering Savings Goals

I love the idea of reverse engineering goals to calculate savings. It’s more specific than a vague 50/30/20 rule. Let’s assume the best-case scenario, that I can save as much as I want (lol, but anyway).

The idea with reverse engineering goals is to work out how much I need, how long I have, and then calculate how much to put aside each pay.

For example, at the beginning of next year, I have one child starting high school and the other starting senior school.

One needs a laptop, and they both need new uniforms and shoes. There are also resource scheme fees, class fees, band fees, and camp fees in the first term.

That’s a few thousand right at the beginning of the year.

Oof.

I wish I’d started saving earlier, but the truth is, there were other bills and thinking about saving for next year wasn’t an option.

So, with six months to save around $3,000, I need to put aside $250 a fortnight.

Obviously $1 per fortnight is not going to cover it. And there are frugal strategies I can employ to bring the total cost down (refurbished laptop, second-hand uniform, payment plan for the fees, and make cuts elsewhere).

But a savings habit helps, even if it doesn’t cover all goals or expenses.

How I create a Pay Myself First Budget

Here’s what we currently save for (your goals will be different).

• Retirement (as a self-employed person, I pay myself first by paying super before expenses, even though I’m tempted not to sometimes).
• Emergency fund (to cover things like a bung washing machine)
• Future bills
• Upcoming ‘big’ expenses like schooling.

Other goals that I’m not currently saving for but could include investments, a house deposit, a car, travel, and renovations.

Once I’ve got a few goals in mind, I reverse engineer those into fortnightly amounts and then build our budget from there.

Our budget is a variation on Dave Ramsey’s zero-based budget. You can read more about how I create a simple budget here, but to summarise, it is basically:

Income – savings – fixed expenses – less discretionary expenses = a small leftover buffer for that occasional coffee

And again, there have been times when ‘savings’ amounted to $1 per payday. When money is that tight, I found that forming the habit of saving is still important.

These Three Strategies Help Me Pay Myself First

The following three strategies have helped me stick to my budget when times are tough.

1. Automating my savings
2. Know what I’m saving for
3. Saving for the bills (bill smoothing)

1. Automating Savings

I find automating the savings so that it comes out each payday, without me having to think about it or do anything, helps me stick to my savings plan.

Automation works because:

1. I don’t miss money I don’t see
2. I don’t need to rely on discipline I don’t have

A friend once told me her savings “burned a hole in her pocket” until she spent them.

I get it.

There are so many necessary short-term expenses and just as much temptation.

‘What the heck, I’ve got the money for takeout, I’ll start saving next week.’

But when I automate a withdrawal from my savings account, I don’t see that money, and so it doesn’t tempt me.

Out of sight, out of mind.

2. Knowing What I’m Saving For

When I don’t have immediate and pressing expenses, it’s hard not to dip into savings. Because it’s hard to save for six months for school fees when you feel like a treat today.

So, unless it’s an emergency, I try to do everything I can to not rob my savings for treats – that includes not using my credit card.

It helps to have clear goals with specific amounts and end dates. Vague future savings don’t hold up well against the pull of “I want this now.” But with something concrete to aim for, I’m more motivated to stick to the plan.

3. Saving for the Bills

Saving a little at a time (aka bill smoothing) has been the best saving strategy I’ve used.

We’ve been bill-smoothing for many years now, and it takes so much stress out of budgeting. I don’t have to scramble to find several hundred dollars when a big bill lands.

I’ve written more about this here:

• Make Bill Paying Easier With a Modern Envelope System
• Our simple budgeting system
• Saving for multiple goals

Even if we can’t save the entire amount, having something set aside still helps. And automating it means we don’t miss the funds, we just live off what’s left.

While paying yourself first won’t suit everyone, it’s something that’s worked well for us — even when it’s just a few dollars each payday. It’s helped us build a savings habit and a buffer for the future.

What about you?

Do you use the “pay yourself first” method — or something different that works for you? I’d love to hear your savings habits (especially the weird or wonderful ones!). Pop a comment below or share a win — no matter how small. It all adds up.