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 you need to put petrol in the car.

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

Saturday comes you 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 you’re still recovering from when the washing machine stopped working last month.

Before you know it, there’s no money left, and you’re 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 you pay yourself first when money is tight and covering day to day expenses is a juggling act?

If you’re barely making ends meet, paying yourself first might seem like a pipe dream.

But I’ve found, even putting away $1 each payday can help.

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 2ltr 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 you need new shoes, or the washing machine dies, having money put aside – even if it’s only part of what you 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 and 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 to that $20 isn’t going to make a difference anyway, so why not enjoy it now.

And sure, $20 on smashed avo and a latte isn’t going to buy a house in Sydney…or anywhere. I’m not here to over-exaggerate the compounding power of saving a few dollars here and there.

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

But, regularly and consistency putting aside savings, even if it’s only a few dollars out of the $20 (and I just have the coffee – I don’t want to be Spartan), adds up. 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 our spending after the fact.

One of my favourite behavioural economists (I never thought I’d write that statement) is Dan Airley. 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 that emotional and cognitive biases frequently lead us to make decisions that aren’t always in our best financial interest and I’ve found this insight particularly relevant when it comes to automating savings to take some of the emotion out of decision making.

So, when we pay ourselves first, especially if we automate it, we eliminate the need for disciple, because we’ve made the rational decision before payday.

The Big Question – How Much?

How much should we pay ourselves first?

How long is a piece of string?

According to Nerd Wallet, if you follow the 50/30/20 principal, then they recommend allocating 20% of your disposable income to savings.

Which is hella lot more than 0.6% that Australians can currently afford…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. I know that the cost of living pressures of 2024 make things harder for people in their 20s now, but that doesn’t mean we had things easy.

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, reinforces a habit. And it’s useful to already have a savings habit when we actually had more than $1 to save.

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 rul. Let’s assume 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, the timeframe I need to save, 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 uniform, shoes, plus there’s the resource scheme fees, class fees, band fees, and camp 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, 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).
• an emergency fund (to cover things like a bung washing machine)
• savings for 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, renovations.

When I have some goals and I’ve reversed engineered those goals into total amounts and what I need to put aside each payday, I work out a budget.

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

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.

The reason automation is so effective is twofold:

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

I had a friend once who told me whenever she had savings they practically burned a hole in her pocket until she spent them.

Those were her exact words – burned a hole in her pocket – and I’m not judging because I can totally relate.

There are so many necessary short-term expenses to spend money on not to mention so much temptation to spend on unnecessary things as well.

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

When I automate a withdrawal from to my savings account, I don’t see that money and so it can’t burn a hole in my pocket, so to speak.

Out of sight, out of mind.

2. Knowing What I’m Saving For

When I have got immediate and pressing expenses, it’s hard not to dip into savings. Because it’s hard saving 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 not to rob my savings for treats – that includes not using my credit card.

It helps to have specific goals with specific amounts and end dates. Saving for some vague future just doesn’t cut it when you want to spend today. There’s no real reason to keep saving.

But with a specific goal, it’s easier to forgo short-term gains of today for something I’m looking forward to (or a something I have to pay for) in the future. And I know there’s a finish line.

3. Saving for the Bills

Saving for upcoming bills 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 of the stress out of paying the bills when you don’t have to scramble to find several hundred dollars at once.

I talk more about how I bill smooth in these articles, but it’s similar to reverse engineering goals – working out how much I need and dividing it by the number of pays until the due date.

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

Again, even if we can’t save the entire amount, it still takes the pressure off saving some. Also, automating these savings means we don’t miss the funds and live off what’s left.

While paying yourself first isn’t right for everyone, there’s a reason many budgeting experts argue it’s a powerful budgeting strategy. I’ve found it’s helped us, even if it’s only a few dollars a payday. It creates a solid habit and a buffer for the future.