At this point in your financial life, you may have heard the advice to “pay yourself first”. Others may call it reverse budgeting, but no matter what you call it, the concept is the same: you remove money for saving and investing from your account as soon as you get your paycheck. This system is designed to ensure that you aren’t spending your future income on current expenses and potentially items you don’t need. As much as this is good advice to give, very few people actually follow it, and there are two big reasons why. Here we address steps you can take to pay yourself first without going broke.
“I Can’t Afford to Save for the Future When I Can Barely Afford to Live Today.”
This is a REAL struggle. Especially in the current student loan climate, extra money to put away for tomorrow is hard to come by. In fact, sometimes it’s impossible to come by. Chances are, however, that you could save something (however small it may be). When you needed a new pair of sneakers you were able to find the money for it, right?
Check your budget, where is your money going? If it’s all going to student loans, it may be time to consider lowering other aspects of your spending. Can you cut back on non-essentials like eating at restaurants? If you’re already living a barebones existence when it comes to non-essentials, are there other areas you could cut back like housing? It make take you longer to lower your cost of living that way, but personal finance is a long game anyway. If you have credit card debt try to negotiate your interest rates. If you have car insurance, shop around for lower rates. Get creative. Nearly everyone has something they can cut from their budget.
A budget is the most crucial part of paying yourself first without creating further complications. Write one out or use a budgeting software such as YNAB or Mint. Hold yourself accountable to meet those spending targets so that whatever is remaining really does make it to your savings account.
“If I Pay Myself First and an Emergency Pops Up, I Won’t Have Enough Money to Cover It.”
The next argument is common and I used to get tripped up here as well. The flaw in budgeting is that life never goes as plan. You can be the most dedicated budgeter in the world and yet unforeseen circumstances will still arise. So how can you pay yourself first when you fear that you won’t have enough to cover an extra expense?
The easy cheat to this excuse is to open a savings account that is incredibly liquid. In other words, it should be a savings account at the same bank as your main checking account so that you are able to transfer funds between the accounts instantaneously. At the beginning of the month (or when you receive your paycheck), take the amount you plan to save based on your budget and immediately move that amount to your savings account. Now the harder part is pretending that money isn’t there and trying to stick to your budget without touching it. At the end of the month, take the money you squirreled away in your savings account and move it to an investment account. You can then repeat this process each month.
The idea behind this holding account is that you have money you can access quickly if you really need it. It’s a good way to protect yourself if you are still in the process of building an emergency savings fund. However, you don’t want to leave money in this account long-term because you could be missing out on the miracle of compound interest, and because it’s so easy to access you run the risk of tapping into it for something you WANT more than something you NEED.
Do you need to build an emergency savings fund? Check out our article and free template to help motivate you!
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA, finance writer, and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband and adorable daughter. When she's not working, she enjoys spending time with her family, taking their lovable mutt for walks, or reading a good book while buried under a pile of cats.