Why Pay Yourself First Might be Bad Advice

Pay yourself first. We have all heard the saying that is promoted as one of the tenants to sound financial management. It is true that having money in savings – a financial safety net – can mean the difference between surviving a financial emergency and digging deeper into debt. However, for some people it may be more beneficial to focus on saving after they meet their financial obligations.

Goals

Everyone has financial goals. These may be creating an emergency savings account, reducing or eliminating debt, retirement savings or other personal goals such as purchasing a vehicle or a home. A goal is meant to provide the reason and the motivation for saving money. When creating a goal, make it simple, but specific. How much money is need, when is it needed it and what are the steps to get there.

Plan

Rather than focus on past spending, this method of planning looks toward the future. We typically know how much income we will bring in each pay period. There may be some fluctuations, so try to budget using the least amount. For instance, if someone typically earn $700 a week, but occasionally receive $600, use the lower amount for budgeting purposes.

Determine monthly expenses and note the due dates for each bill. Using this information, make a plan for paying bills each pay period. If someone is paid once a month, this may be straightforward. If they are paid multiple times a month, they may have to “pay themselves” a portion of the bill and come up with the other portion on the next pay day. However, there may be some bills that can sent to the creditor in multiple payments. This is often true with utility bills such as electric, water, sewer and garbage. As long as the bill is paid in full by the due date, penalties can be avoided.

Automate

We also know how much our bills will typically be. Create automatic payments for each of these bills. Set them to be deducted from a checking account, so that the payment coincides with paychecks and the due date of each bill. Creating automatic payments helps people avoid making late payments and avoid late fees. It also ensures that the money is not spent before the bills are paid.

For some people, this is a significant change from how they usually pay their bills. It can be scary to know that they money left over after meeting expense is all that is available until next payday. This is why maintaining a savings account balance and prioritizing spending are so important.

On the other hand, many people love this method, because they know their bills are paid and they have an exact amount of money they can use for whatever they decide is most important – groceries, gasoline, dining out, movies, etc. 

Bottom Line

What is Left After…

  • Rent or mortgage,
  • Utilities and insurance,
  • Loan payments (student, auto, etc.),
  • Credit card payments and
  • Additional debt payments

The remaining funds are the new take home pay. Use these funds for:

  • Desired savings and investments and
  • Groceries, gasoline, entertainment, etc.  

Not enough income left?

If someone finds themselves in a situation where they do not have enough income to cover their expenses, there are a few ways to look for savings. We know many people do not enjoy tracking their spending, however in situations like these, it can be helpful. People can identify areas where they may experience spending issues.

  • Cash only – People give themselves a cash allowance and pay attention to where money is being spent. Is it going for necessities or is it being spent on items that are wants? Once the cash is depleted, the spending stops.
  • Single card – Using a single debit card debit or credit card, is also a good way to track expenses. This way someone can review all expenditures over a period of time and look for areas they may be able to cut back on in the future.
  • Review previous spending – This tracking method uses prior bank statements and credit card statements to determine areas of spending. Download a copy of statements and create categories of spending. Look for groceries, gas, dining out, entertainment, etc. compare those amounts to what was budgeted. Try to adjust categories of spending to levels that allow for savings.
  • Hold on to receipts – Receipts can be helpful for tracking expenses because people can see each line item they purchased. For instance, if they bought alcohol when they bought groceries they will be able to differentiate the spending.

Keep in mind that tracking is not to stop spending on everything people enjoy. Instead, the goal is to determine if there are areas to cut back and to prioritize things we really want versus items that are nice to have.

Choices

There are typically two options when someone has more expenses than income. They can reduce their expenses or increase their income. Some people provide another option – go into debt. Unfortunately, that choice can make a financial situation go from bad to worse. Here are some examples for increasing income or decreasing expenses.

Increase Income Decrease Expenses
Additional work Eliminate subscription services
Write Carpool or use public transportation
Drive for Lyft or Uber Reduce or eliminate household services
Tutor Bring lunch
Sell Crafts Use coupons
Sell unused household items             Shop second hand stores

For assistance in managing finances or brainstorming income or savings ideas, contact a certified counselor today. Sometimes a person outside of our personal life can provide a better view of our options.