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February 27, 2018
February 27, 2018
One of the best financial habits you should adopt is to start paying yourself first. I started paying myself first back when I was eager to get out of debt and it made a big difference.
Paying yourself first involves making saving a priority by stashing away some of your money as soon as you receive a paycheck. According to this philosophy, if you run out and pay all your bills and living expenses before you pay yourself first, you're doing it all wrong.
Sure, you have needs and wants, but by paying yourself first, you prioritize yourself now and in the future. For me, paying myself first helped me pay off debt faster and save money at the same time. Paying off debt wasn't technically 'paying myself first'. But, putting extra money toward my debt was saving me money on interest in the long run.
Plus, it was helping me gain more of my freedom back which is something I value. Prioritizing to pay myself first even allows me to stash away my first small emergency fund while I was paying down my debt.
If I had waited to make extra debt payments and savings contributions until I paid all my bill and other expenses for the month, I probably wouldn't have had enough left over to make much progress.
While there is no doubt that paying yourself first can be very helpful, some people suggest you should just stop budgeting altogether if you are saving, paying off debt, and investing first. I disagree with this idea. Here's why.
Budgeting is not everyone's favorite thing to do, but it's very necessary and doesn't have to be painful at all. A budget is simply a spending plan that you have complete control over. You identify how and where you'd like to spend your money depending on your circumstances.
When you pay yourself first, you'll be taking care of your most important goals as soon as you get paid so you won't have to worry about rounding up the money to save and invest later in the month.
While that's a good thing, it doesn't necessarily mean that you don't need to budget for anything else. If you don't budget after paying yourself first, you won't really know how much you have leftover to pay for your housing, groceries, insurance, etc.
This is why it's crucial that you keep your budget and pay yourself first.
Budgeting also helps you keep track of all your income and expenses which allows you to get to the point where you feel comfortable with paying yourself first. Let's say you track your spending and realize your spending $200/month on dining out when you only budgeted for $100.
That extra $100 could have been going toward another expense or could be part of the reason why you feel you can't afford to pay yourself first.
It's crucial that you still track your income and expenses as you pay yourself first so you can maximize your financial progress. Maintaining a budget can help you to that.
One of the reasons why so many people opt to pay themselves first in an attempt to ditch budgeting is because they're trying to get rid of that hectic line-by-line budgeting style that everyone hates.
There is no rule that says you have to budget strictly and only dedicate a certain percentage of your income for the fun stuff. There is also no rule that states you need to beat yourself up whenever you go over your grocery spending by $15.
These are rules we impose on ourselves and they tend to stress us out and make us hate budgeting.
When it comes to paying yourself first, it just seems easier and it is when you compare strict line-by-line budgeting.
For example, let's say you bring home $4,000 after taxes each month. You add up all your savings and investment contributions to get a total of $1,200. This means you have $2,800 left to spend on whatever you want, right?
Not necessarily. Just because you're doing an awesome job at saving thanks to this method, you still need to figure out what you want to spend that $2,800 on. You probably have automatic bill pay set up for certain accounts, or you might have some unexpected expenses that pop up.
If you resort to spending the remainder of your income for the month "however you please", who's to say you won't end up short when it's time to pay an important expense? This can lead to you getting into a pretty bad situation.
Replacing your entire budget with the pay yourself first method is not a good idea. This is because paying yourself first is a budgeting method in itself.
You're still budgeting when you do it, but not as harshly so it's a nice relief. Plus, you'll be seeing some much better results in terms of increasing your savings.
Just don't forget that you still need to develop a rough spending plan for the rest of your money and regularly track your income and expenses.
Stop managing your money in a way that makes you feel deprived or uncomfortable and you won't have to choose between one or the other.