Friday, December 15, 2017
The Most Important Money Habit You Can Ever Develop
We are concluding Habits Week here at Budget Boss and what better way to end it than with the most important habit you can ever have. Saving money, paying bills early, planning and protecting what’s important are all noble traits. What I am talking about is how that all goes down. How do you achieve that balance between taking care of today and working towards tomorrow? You have probably heard about it before, but the “Pay Yourself First” method is the best way to get ahead in life. Do we really know what exactly the pay yourself first method means? Do we really know why it is important? The simple fact is that all successful people do it. CEO’s and heads of large companies all pay themselves before anyone else gets paid, kind of disturbing but it’s true. Heck, they even get their bonuses no matter how well the company performs. We all should focus on treating our future the same way. In this post, I will describe the “Pay Yourself First” method and why it is so very important to your financial future. This post might be the most important one you ever read, so let’s get started.
What does it mean to “Pay Yourself First?”
The Pay Yourself First Method is an alternative to the traditional money management style of budgeting. If you impose a budget on yourself, you essentially give yourself an allowance for each spending category. It might look something like this:
$4000/month in pay
Expenses:
$2500 for fixed expenses (Housing, transportation, utilities, insurance, etc.)
$1000 for food and entertainment
$300 for miscellaneous spending
$200 for savings goals
Every category has a specific amount and often it gets far more refined than that. Some people break it down further, even having a $30/month allocation for breakfast burritos. While I am an advocate of budgeting, a heavy advocate, I do see some flaws in that kind of system. For some people, it is far too constricting. Some people cannot limit themselves in certain areas of their budget. They would like to spend freely and not have to worry about going over budget on café lattes. For those people, the Pay Yourself First method might be best. If you implement this form of spending, you will often come out far better than even the most expert budgeter.
If you utilize the pay yourself first method your monthly spending might look a little more like this:
$4000/month in pay
Expenses:
$2500 for fixed expenses (Housing, transportation, utilities, insurance, etc.)
$1500 on whatever I want
In that category of whatever I want, will be savings, entertainment, and variable expenses. People find this method better than budgeting because they can get rid of all their fixed expenses, put money into savings, and then spend everything else freely. Someone using the pay yourself first method can dedicate much more to savings because they do worry about the small details of every spending category. They can put away $500 into savings every month including ($200 into long-term savings, $100 into an emergency fund, $100 into short-term savings goals, $50 into educational goals and $50 into a whole life policy). Someone on a budget might find that amount daunting, as they have compartmentalized every category, including all forms of spending.
9 Tips for Maintaining a Positive Cash Flow – Budget Boss
What’s great about the “Pay Yourself First” Method?
I utilize the pay yourself first method instead of very strict budgeting for a simple reason: Freedom. Some months I spend most of my variable spending on food. Some months it’s entertainment. For me, if I am putting money into my investment accounts I am alright with blowing every dollar. I make sure during the month that I am not frivolous, and I practice frugality. I don’t blow every last dollar on nonsense, just the stuff I need and wish to do. I pay attention to my spending habits, but I am not allocating certain amounts in each category. I am cognizant of upcoming expenses such as maintenance and possible travel expenses. I make sure I put money away for things I know I will have to pay for in the future. That comes off the top when I get paid.
I would rather have the money for my future disappear before I can spend it than try to save money at the end of every month. For me, I would rather be broke with savings, than be broke in general. I have no problem with being broke as long as I put money away first. If I have a budget deficit one month, I chill out the next month to make it up. This is only possible with a sufficient emergency fund. My emergency fund acts as a buffer between my spending and income. I have gotten to a point where I can pretty much judge how much I have spent over the course of the week. Some weeks are better than others, but the credit card always gets paid off and ends the month at zero. For me, the PYF method is what allows this freedom. Even if I spend a bit too much one month, I still contributed to savings and paid all my obligations. I pay myself back instead of the bank or Mr. VISA.
The “Pay Yourself First” Budgeting Method – The Balance
What is not so great about Paying Yourself First
Paying yourself first requires discipline. It can be very easy for someone to put money into savings and go into debt by the end of every month because they put too much money on their credit card. It can also be the case that you spend too much and have no money until you get paid next. That can be a problem if you have people who are dependant on you. PYF also requires you to have a consistent income. If every 2 weeks money is coming out of your account and going into an investment account, you better have that money coming in every two weeks. The emergency fund is also a very important component of the PYF method. To make sure you are on budget every month, you may need a buffer that gives you some leeway if you have an expensive month. Using the emergency fund for this purpose requires you to have the discipline to pay it back as soon as you can, hopefully, the next month.
For people with erratic spending habits, they can institute the pay yourself first method as well as budget the rest of their money. For example, you may have $200 coming off each of your paycheques and put into savings, but then spend far too much of the rest of your money on useless stuff. With the rest of your money, you should set up a spending plan and make every dollar count. You can do this until you have the instincts and discipline to not blow all your money on junk and have it run out before you get paid next. It will take a little bit of time, but before you know it you will be very in tune with your spending and it will be second nature to not go over budget.
I personally think we all should pay ourselves first. Dedicating our money to our futures before we have a chance to spend it on our presents is vital to success. The two most important assets you will ever own are time and money. Paying yourself first allows you to maximize both those assets and use them to your advantage. It is truly the best way for anyone to become financially independent.
Thanks for tuning in for Habits Week at Budget Boss. Make sure you join us next week as I will be reposting my most popular blogs from this year as we close out 2017. If you would like to implement the pay yourself first method in your savings plan, please message me at joe@budgetboss.ca and let’s get started. Have a great weekend Bosses!
“A cardinal rule in budgeting and saving is to pay yourself first. Once your paycheck hits your account, wisdom has it that you should move some amount to savings even before you pay the bills.” – John Rampton
Email – joe@budgetboss.ca
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