The "Pay Yourself First" Budgeting Method
Try This Fun Alternative if You Don't Want a Line-Item Budget
If budgeting your personal expenses sounds boring, you might be going about it the wrong way. When people think about formulating their monthly or yearly budget, they often imagine a strict line-item budget that details the precise amount they need to spend on groceries, gas, utilities, restaurants, and other expenses, down to the last dollar.
Many financial advisors and planners recommend that you take a different route and pay yourself first when you get your paycheck, rather than starving your savings account to feed the bill collectors.
Type A vs. Type B Personality Budgeting
Creating and maintaining a strict budget down to the dollar is quite time-intensive and laborious, especially when it comes to tracking your actual spending against your budget. Designing this type of structure works well and might even be enjoyable if you are a methodical and highly-organized person. If you don't get excited about developing and adhering to this kind of structure, try the Pay yourself first method. It's perfect for a big-picture person who has difficulty making or sticking to a budget.
In the past, you've always said you'll save money for retirement or for that vacation. However, when your paycheck comes in, it seems to get used up by bills and unexpected expenses, and any surplus gets frittered away on a dinner out, some fast food or trips to the nearest Wal-mart for non-critical items.
So you tell yourself that you'll save money from your next check, but the cycle repeats itself, and your savings never seem to grow. Instead of waiting to pay yourself last, when there's nothing left, make yourself a priority and put aside money into your savings first. This way, you can take care of your future self.
According to a recent survey by the website Bankrate.com, more than a quarter of all Americans have no emergency savings at all, and only 23 percent have enough saved to get them through six months of monthly expenses if they were to lose their income.
Developing the "Pay Yourself First" System
The "Pay Yourself First" way of budgeting begins by simply writing down how much you bring home per month. For example, let’s say you earn $4,000 each month in take-home pay, after taxes.
After writing down your net monthly pay, write down your savings goals for each area of your life. For example, you might decide you want to put aside funds for the following:
- $400 a month for an individual retirement account
- $200 a month to put towards buying your next car in cash
- $100 a month to put towards future car repairs
- $200 a month towards future home repairs and maintenance
- $50 a month to pay for an annual vacation
- $50 a month towards future home, auto, and health insurance deductibles and co-pays, which you might want to consider an emergency fund)
- $200 a month (or more) to pay for your kid's college education
That's $1,200 a month you have decided to put into savings for yours and your family's future. Now, subtract this $1,200 from your monthly net income of $4,000. You’re left with $2,800 per month. You can spend this money freely to pay bills, get coffee every morning, eat dinner out or whatever else you need or want, without worrying over what category it falls into.
The Top-Down Approach
This system is really easy because you don't need to spend any time figuring out what percentage of your money is going towards your rent vs. groceries vs. electricity. Just pull your savings from the top and then relax and use the rest to cover those expenses.
This "anti-budget" feels antithetical to the traditional budgeting model, but it's equally effective.
The entire point of a budget is to make sure you're hitting your savings goals without letting overspending in other areas eat up your excess funds. The traditional, line-item budgeting model is a bottom-up approach. The "Pay Yourself First" method is a top-down approach. Both are fine. Personal finance is personal, so choose whichever style works best for you.