If you're like me, each pay cycle you tell yourself that this time you'll put a good chunk of it away in the bank.

But by the time you've paid for everything– rent, groceries, phone bill, morning coffee, dinners out, online bargains – you’re left with nothing to contribute to savings. And the earn-spend-and-save-what’s-left strategy cycle fails to produce results.

But there is another way.

In the first article in this series, we explored Christine Benz's 30-Minute Money Solutions budget.

Then we looked at how you can put your spending and savings on autopilot with the 50/30/20 rule.

Today, we unpack the “pay yourself first” budget. This simple strategy ensures that your long- and short-term savings goals are covered before your pay even hits your spending account. You can think of it as a reverse budget – earn-save-spend-what's-left.

Getting into the habit of paying yourself first can be tough, but we'll show you how putting your savings on autopilot can produce powerful results.

The concept

The pay-yourself-first strategy is simple. Every pay-day, the first thing you do when the money hits your transactions account is transfer a percentage into your savings account.

Whatever's left over is there for you to spend on your fixed costs (rent, utilities, phone bill) and variable costs (groceries, eating out, entertainment).

Putting your savings goals before expenses removes the temptation to overspend, and ensures you make regular savings contributions, pay cheque after pay cheque.

Developing your own pay-yourself-first system

Step 1: calculate your after-tax income

As in the 50/30/20 budget, you must first calculate the amount of income you receive each pay cycle.

Your after-tax income is your employment income minus your level of income tax and the Medicare levy (if you pay it). If you're on a higher income, you may also pay an additional Medicare Levy surcharge if you don't have private health insurance. Your employer might also pay a portion (9.5 per cent) of your pre-tax income into a superannuation fund. If you're still paying off your HELP loan, include that too.

To help calculate these amounts, try PayCalculator.com.au.

Then divide this amount by how often you get paid. For example, if you make $50,000 a year in after-tax income, and get paid every two weeks, you should be pulling in around $1,900 fortnightly.

Eg. $50,000 / 26 = $1923

Step 2: set your savings goals

Next, jot down your savings goals, big and small, and how much you'll need to set aside each pay cheque to reach those goals.

Morningstar research suggests that identifying these goals can be harder than you might think. For instance, 73 per cent of Americans people can’t accurately state their top three financial goals when asked. Instead, many respond with the first items that come to mind.

Morningstar head of retirement research David Blanchett has devised a list of common financial goals to help get you thinking.

Common financial goals

  • To pay for personal self-improvement (e.g., go back to school, learn a skill)
  • To experience the excitement of investing
  • To start a new business
  • To buy a house
  • To help pay for my kids’ college education
  • To stop working and do something I love
  • To go on a dream vacation
  • To care for my aging parents
  • To give to charity or other causes I care about
  • To leave an inheritance to my loved ones
  • To retire early
  • To pay for future medical expenses

Source: Morningstar


Something to think about: an emergency fund

If you don't have one already, saving for an emergency fund is an essential part of any financial plan.

Here's an example of how you could work towards a savings goal. The ING savings goal calculator can help you with these calculations.

  • Let's say you want to put aside $3,000 this year for an overseas holiday. You'll need to save just over $115 fortnightly.
  • On top of that, you also want to save $5,000 this year to go toward a deposit on a home – saving about $192 a fortnight.
  • And $2000 this year towards making your first investment – or $76 a fortnight.

In total, that's $383 a fortnight you've decided to put into savings. Next, subtract your savings goal from your total after tax fortnightly income.

E.g. $1923 - $383 = $1540 

$1540 is what you have every fortnight to spend on your fixed and flexible expenses.

When you're evaluating your savings goals, be realistic. It is possible to save too much if your goals are overly ambitious, and you risk not having enough to cover your expenses. Using your real past expenses as a template for your budget helps anchor you in reality.

If you're struggling to work out how much you should be saving, or don't have a particular goal in mind, a good rule of thumb is the 50/30/20 budget rule, which suggests putting 20 per cent of your income into savings.

Step 3: automate your savings

Instead of manually transferring your savings to your savings account every time you get paid, which is a difficult habit to form, most banks allow you to set up automatic recurring transfers between accounts. 

First, check your bank account to see on which day your salary is deposited. Next, set up an automatic transfer service from this account on the day your salary arrives.

Some workplaces allow you to register multiple bank accounts into which you direct your salary. Ask your payroll/accounts department if this is available.

Tip: look outside the major banks for some of the best standard variable and maximum variable interest rates for high interest savings accounts on the market.

Step 4: review your progress

Finally, establish a plan to regularly check how you're tracking with your new budget. Don’t create a budget and then leave it in the drawer.

Block out time on your calendar to see if your savings goals have been unrealistic or whether you could be doing more. If something material has changed in your financial picture, adjust your budget accordingly.