In part one of this two part article I talked about the theoretical part of paying yourself first. Planning our the month’s income and expenses to spend every dollar on paper before the month begins, making sure you allocate the money first to your number one priority, such as saving, investing, etc.
Now that you’ve allocated money toward that number one item, it’s up to you to actually spend according to your plan. If that item is indeed the top priority for you, then make sure you pay that item first, before any other bills get paid. If you do that, there’s no more money in your account to pick up all the little wants and ankle biters that come along and ruin your budget. When the money is taken out of the account right away, it forces you to say no to the little things and ensures you say yes to the big things that are important in your life.
There are three basic methods for paying yourself first. My favorite is the automatic withdrawal from your account. We use auto withdrawals for as many bills as we can because the money is taken out of our account automatically and we don’t have a choice in the matter. We are forced to stick to the budget when we use auto withdrawals. This works especially well for investments, taxes, health care savings accounts (HSA’s) etc. because the money is taken out of your check before you even see the check. It’s like you never had the extra money and you learn to live without it. Plus, for many of the expenses that work well with auto withdrawals, you get a tax break for having it withheld from your check so it’s saving you more money in the long run.
The second method for paying yourself first is manually paying the bill at the beginning of the month. It sounds so easy but it takes a little discipline to do. The main point is to get the money out of your account before the ankle biters have a chance to appear and ruin your spending plan.
Cash envelopes are another, less obvious way to pay yourself in an indirect way. By taking money out of your checking account and placing your budgeted spending amount for each category into a cash envelope, you are paying those categories first. You then are forcing yourself to only spend the amount you put in the envelope. This also prevents you from impulse spending later on every little thing that comes up. Or if you do, you have to steal from your own cash envelopes to purchase that item. So at least there is some pain felt because if you purchase something that’s not in your plan, you are doing so at the cost of something else that is in your plan.
No matter which method you choose (I recommend a combination of all three), the act of paying yourself first can save you a lot of money and help you reach your goals by helping you avoid temptation and overspending on low priority impulses. The long term benefit is definitely worth it!
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.