Pay Yourself First and Forget Budgeting!

Let’s face it, the idea of budgeting is unpleasant for most people.

Even though there are multiple ways to quickly estimate your expenses, many people dread the idea of figuring out how much they spend each month. As a financial planner, I notice reluctance to plan since it traditionally requires a deep dive into your spending habits.

In my professional experience, many budget-based financial plans tend not to come to fruition. People get busy with their lives and staying on top of your expenses is a chore that most would rather not think about.

Let me make this clear - this applies to all generations and it’s not uncommon to work with someone who is close to retirement and doesn’t have a good idea of their expenses. We should also remember the ever-present “lifestyle creep” issue is alive and well. For those who are less familiar, it refers to spending more as you continue to earn more.

So how do we solve this issue and hopefully have more people with successful financial plans (meaning those that are actually implemented and not just on paper)? This is where the concept of paying yourself first can be incredibly helpful.

Let’s start with the basics so that you know where I’m coming from.

Traditional Approach (Focus on Expenses)

Under the traditional approach, we would begin the planning process by reviewing your expenses and income.

Once we understand these variables, we would come up with an appropriate amount of savings based on your situation and financial goals.

• Let’s say you earn $10,000/month and your take-home pay is $7,500/month.
• If your expenses are around $6,500/month, that leaves $1,000/month for saving and investing.
• We would suggest the best approach to invest $1,000 each month for retirement or any other purposes.

On paper, this looks doable, but it doesn’t work well for many people in practice. Your expenses tend to change and there is always a possibility that no funds will be available for investments in any given month. You have to be on top of your finances to make this work which is simply not realistic for many people.

What if we reverse the order to simplify things for you?

Pay Yourself First Approach (Focus on Savings)

Under the pay-yourself-first approach, we develop your plan in reverse.

Specifically, we figure out how much you need to save each month and set up those savings to happen automatically.

Going back to the previous example, let’s say we’ve determined that you need to save $2,000/month to accomplish your goals.

• $1,000/month needs to go into your 401(k), $500/month into your IRA, and the remaining $500 into your brokerage account for general investing.
• We would set these amounts to be saved automatically each month (or any other frequency).
• You are now on track to accomplish your financial goals and any remaining income can be safely spent on anything you’d like.

No more budgeting!

What does this mean to you?

If you are struggling to save even when you have significant income, don’t despair.

This is a common issue that many people struggle to resolve.

Instead of focusing on spending, focus on savings first, and you may find yourself in a much better situation in both the short term and, even more importantly, the long term.

As they say, there’s more than one way to crack an egg.