Pay yourself first
Concept
The most reliable way to save is to do it first. Pay yourself first means moving money to savings as soon as you're paid, and living on what's left, instead of saving whatever happens to be left at the end of the month. (There usually isn't much.)
The best version is automatic: a 401(k) deferral taken from your paycheck, and a transfer to savings scheduled for the day after payday. Automatic saving works because it doesn't depend on willpower.
In this course, your savings pool is the money left each month after your budget:
savings pool = monthly take-home pay − monthly budget
Your budget is a list of lines, each with a monthly amount and a type:
- Need: housing, utilities, groceries, insurance, basic transportation, medical costs
- Want: dining out, entertainment, travel, subscriptions, upgrades
- Debt payment: loans and minimum card payments, with an end date if there is one
The type matters. Needs and wants rise with inflation each year. Debt payments stay fixed until they end, as real loan payments do. And when a debt ends, its payment moves into your savings pool automatically.
Worked example
Maya's take-home is $3,900 a month. Her budget is $3,350: $2,300 of needs (rent and utilities, groceries, transportation, insurance), $700 of wants, and a $350 student loan payment that ends in December 2034. Her savings pool is $550 a month, about 14% of her take-home pay. On top of that, her 4% 401(k) deferral and her employer's 4% match go in before she's even paid.
Your numbers, and the effect
Enter your budget, line by line. Mark each line as a need, a want or a debt payment, and give any loan its end month. Start with the big lines; small things can be grouped ("Everything else").
You're in the free preview, practicing with Maya's numbers. Create an account to save a plan.
The chart compares your budget with the 50/30/20 guideline. The gold box is your savings pool: the fuel for everything that follows.
Checkpoint
Answer at least 70% correctly to unlock the next lesson. Retakes are unlimited, and every answer is explained.
Common questions
How do I find out what I really spend?
Look at two or three months of bank and card statements and group the spending into lines like housing, groceries, transportation, insurance, debt payments and fun. Most people underestimate spending by 10% to 20% on the first try, so round up.
Should my 401(k) deferral be in my budget?
No. Your 401(k) comes out before your take-home pay arrives, so it's already handled. Your budget covers only money spent from take-home pay.
How often should I update my budget?
Check it monthly for the first three months, then quarterly, and whenever your life changes: a move, a new job, a new child, a loan paid off.
Still stuck? Search the help center or the glossary.