So far on our Financial Wellness Journey, you’ve learned how to track your spending and design a monthly budget and create a plan for paying down debt. Now it’s time for the next step: learning how to pay yourself first.
“Pay yourself first” means making your own savings a top priority—not something you only do if there happens to be money left at the end of the month. Treat savings as a fixed line in your budget that happens every payday, on purpose, every time.
1. Revisit your budget
Start by looking at how your money is currently allocated. A helpful framework is the 50/30/20 budget: about 50% of your after tax income for needs, up to 30% for wants, and at least 20% for savings or debt payoff. Use this as a guide to decide how much you can consistently direct toward saving. You can always revisit step one of our Financial Wellness Journey for more on building a monthly budget.
2. Define short and long term goals
Give your savings a job to do by deciding what you’re actually saving for.
- Short term goals might include building an emergency fund, a small “rainy day” cushion, or money for near term expenses like travel or a new phone. Many experts recommend saving three to six months’ worth of essential expenses in an emergency fund to help you handle surprise costs or a temporary loss of income.
- Long term goals can include retirement, a future home down payment, a new car, a career break, or other big ticket dreams that are several years away.
Once you’ve listed your goals, narrow them down to what feels realistic right now and assign a dollar amount to each.
3. Set timelines for each goal
Now connect each goal to a time frame. Decide when you’d like to reach your emergency fund target, when you want that vacation funded, and how you’ll build toward retirement over time.
It often makes sense to prioritize your emergency fund first so you’re protected from unexpected expenses while still contributing something to retirement, making compound growth work in your favor. You might direct most of your savings toward your emergency fund until it’s fully funded, then shift more toward other short and long term goals. If you have access to a 401(k), IRA, or other workplace plan, consider talking with your human resources department or a tax professional about the options available to you.
4. Figure out your monthly savings amounts
With targets and timelines in place, calculate what you need to save each month. Take the total amount for each goal and divide by the number of months in your timeline. For example, if you want an emergency fund of 24,000 dollars in four years, divide by 48 months to get 500 dollars per month. That’s your monthly savings target for that goal.
Repeat this for each goal, then check how the totals fit into your budget. Remember that long term savings may earn interest or dividends over time, which can help you reach your goals faster. Keep prioritizing your emergency fund in the early stages so one unexpected bill doesn’t undo your progress.
Start saving, keep growing.
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The information provided is accurate as of the publication date and is for educational purposes only and doesn’t constitute financial, tax, legal, or accounting advice. It is to be considered as general information, not recommendations. Please consult with an attorney, financial, or tax professional for guidance.
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