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