Firstly I just want to say, Don´t make budgeting your personal expenses boring. Many of us go about this the wrong way! When people start thinking of how they´ll start to put a savings plan in action they do a strict budget system that is precise, How much for groceries, gas, utilities, etc and they end up hating it.
Those in financial fields such as advisors and planners highly recommend taking a different approach. What´s this approach? Pay Yourself First when you get your paycheck rather than going into it only paying bills and starving your savings account.
Type A versus Type B Personality in Budgeting
Making and keeping up with a strict budget system down the exact dollar is quite a time draining task. Especially when it comes to tracking your actual spending. This type of budgeting system may be enjoyable if you´re a highly organized Type A. But, the rest of the population doesn´t feel very excited or joyful about sticking to this type of strict budgeting.
If you´re like me and tend to be more of the ¨Big picture¨ type of person and it seems that you´ve never been able to make a solid budgeting system or stick to them in the past, I´d urge you to try the Pay Yourself budgeting method.
Remember when you said you save money for retirement? Or, perhaps for that vacation you´ve always wanted to take? But, whenever you get your paycheck it all just goes on bills and unexpected things and any potential savings get spent on eating out or Target for non-essentials?
You then tell yourself that it´s okay, You´ll just save money from your next check? Only to find that it´s a repetitive cycle that doesn´t stop? Instead of waiting to pay yourself last, when there´s nothing left, make yourself a priority and put aside money into your savings first. That 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.
How to develop the “Pay Yourself First” System
The Pay Yourself budgeting system begins by writing down how much you bring home per month. For example, let´s say you earn $4k each month after taxes.
Write down your savings goals for each area of your life. Example, You may want to put aside cash for some of these areas.
- $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
As you see this example gives you $1,200 a month to decide to put into savings for Yourself 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.
This budgeting system really is easy because you don´t need to spend any time figuring out exactly what percentage of your money is going for rent, groceries, electricity, etc. Take your savings from the top and relax.
This budgeting system is very effective and SO many have benefited!
This Pay Yourself First budgeting system is a perfect approach, rather than the traditional approach that is boring and we find ourselves NEVER doing. Keep in mind, Personal Finance is exactly that PERSONAL, so choose which works for you!
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.
What do you think of this method? What methods have you used?