There are hundreds, if not thousands of financial gurus out there, all spewing the same advice: live on less than you make, pay down debt, avoid credit, invest early and often, etc. It begins to sound like a broken record with them all saying the same stuff. But what I’ve begun to see is that many Americans are tuning the broken record out. The reason: too much noise and not enough valuable content. Everybody is saying what you should do but nobody is saying how to do it.
A prime example is the concept of paying yourself first. That phrase (or dare I say buzzword) has been uttered so many times over the last 20 years that people have become sick of hearing it. And whenever I mention paying yourself first in a coaching session with my clients, their eyes start rolling and their faces show an unmistakable look of disgust. When I press the issue I find that they have heard the term so much that they’ve tuned it out because they don’t really know how to pay themselves first and actually make it work in real life.
What happens to many of us is we do a budget where we plan out our expenses for the month or the year and we put this great number on the paper that shows we’re going to save a bunch of money. But then life happens and little things come along that bleed our bank accounts dry. I call these ankle biters. They’re things like new shoes on sale, or restaurants when we’re stressed and don’t feel like cooking. If we successfully pay ourselves first, we can avoid these ankle biters and stick to a financial plan that works and helps us reach our goals.
So here’s how to make paying yourself first actually work in real life. Pick one thing in your life that is the most important thing financially for you or your family. It could be your retirement fund, emergency fund, giving or tithing, college savings, car replacement fund, you name it. Whatever is the most important thing for you to do financially, that becomes the number one thing on your budget (or spending plan if you prefer to call it that).
When you plan out your budget, in which you spend every dollar of your income on paper before the month begins (I recommend our free cash flow planning form), put your top priority at the top of the list. That forces you to make sure you’re paying that bill first, before any other item hits your list. Then, when you get down to the bottom of the budget sheet to the little stuff like “wants” instead of “needs” you don’t have money left in the budget and you have to say “no” to the little stuff. It’s a forced savings plan that ensures you hit your savings goal and it prevents you from ruining your own plan.
So that’s the theory of paying yourself first and most of us don’t really get past the theory part. In part 2 of Paying Yourself First, I’ll show you how to physically pay yourself first and get past the theoretical budget and into reality.
Matt Wegner is a personal finance, small business and leadership coach focused on teaching his clients the tools for L.I.F.E. (Living In Financial Excellence). Discover which paths are in front of you. Request a free planning session today or visit financialexcellence.net.