Cashology by FNBO

Pay Yourself First

Episode Summary

If you’re struggling to save, you’re not alone. Three quarters of us save 10% or less of our monthly paycheck and the rest of us don’t save anything at all. Asked why, most people will point to the high cost of living – saying that recurring bills and expenses eat up most of their paycheck. But a “pay yourself first” approach can help you build your savings and get you on the road to following a budget.

Episode Notes

Help us understand the “pay yourself first” approach to budgeting

• Paying yourself first changes how you do budgeting
• Normally, we take care of our needs and wants first
• And then whatever’s left over goes to savings
• And a lot of times nothing’s left over
• Instead pay yourself first
• Decide how much to save, set that aside first
• Then budget properly to live off the remainder

But how do you figure out how much to save?

• Follow the 50/20/30 rule
• With after tax income
• Set aside 20% for savings
• 50% for needs – living expenses, housing, utilities, food, healthcare
• 30% for wants – discretionary spending
• The key is to set aside that 20% first
• And leave it alone

What are some ways to make setting aside that 20% easier?

• Make it automatic
• Right from your paycheck
• Direct deposit
• Send the savings to your retirement account
• Or into a savings account
• A lot of companies let you direct deposit your paycheck
• And a lot of them let you split the direct deposit between multiple accounts
• Set it up to be automatic
• It doesn’t all have to go into retirement savings or regular savings
• Split it up the way you want
• But save 20% of your take home pay automatically

What if you don’t have enough left over to pay your expenses?

• With pay yourself first, savings is your top priority
• You may have to adjust your lifestyle
• Find ways to cut expenses
• Reduce your expenses until you can save 20% of your take home pay and still cover your expenses with the rest

Sounds good but what if you just can’t do it?

• You can start with an easier formula
• 50/40/10
• But only for a while
• Work toward 50/20/30
• Cut expenses until you can make that work

Earlier you touched on where to put the savings. Can you expand on that?

• Build up your emergency fund first
• 6 months of living expenses in an emergency fund is the place to start
• Saving for a house is a good way to set aside that 20%
• Not so much for a car or vacation
• The house becomes an asset
• A car or vacation just an expense
• Retirement savings – your 401-k is an ideal spot or an IRA
• You save and get immediate and long-term tax benefits

What about a budgeting tool or software program?

• You don’t have to get fancy
• Paper and pen work
• Or an Excel spreadsheet
• And there are some free budgeting apps too
• I like apps or software because they’ll remind me of all the things I need to budget for and track
• And they make it easy to adjust and make changes
• Just Google “free budget worksheet” to get started
• Or “budget template”
• Some are real friendly and make it feel like you’re dividing your household budget up into “envelopes”
• Others can be much more complex and involved
• Find a way to do it for free
• That’s the ticket

Useful info/links

1. FNBO: https://www.fnbo.com/insights/personal-finance/pay-yourself-first/
2. NerdWallet: https://www.nerdwallet.com/blog/finance/pay-yourself-first-reverse-budgeting-explained/
3. Investopedia: https://www.investopedia.com/ask/answers/12/pay-yourself.asp