Today we welcome back our normal Thursday contributor, Jen from The Happy Homeowner!
Pay Yourself First
It has been touted as the Golden Rule of personal finance, you can find thousands of Google entries proclaiming its wondrous rewards, and there’s no better way to set yourself up for future financial success.
As a subscriber to the theory that you should always automate your savings to be deducted from your paycheck each month before any other bills or expenses are paid, I’ve devised a few creative ways to take the ‘pay yourself first’ idea even further. In fact, my creative spin on this theory of money management has allowed me to save over $90,000 in the past 7 years. It’s also the reason I was able to buy my own condo in Boston before turning 30.
How I Take the “Pay Yourself First” Theory One Step Further
In the traditional sense of paying yourself first, it’s common practice to set up a separate savings or retirement account, automate deductions to be funneled into the account(s), and avoid touching the money. More than establishing a rainy day or emergency fund, it’s a way to establish a solid foundation for a retirement that isn’t wrought with financial woes.
While I currently do this for both my long-term savings and my retirement accounts, I also have adopted the ‘pay myself first’ mantra for funneling additional money into savings.
Essentially, any time I need to dip into my savings account, whether for an emergency or a planned expense, I make that sum become a debt to myself–one that I pay back before spending any money on my variable expenses (other than food and utilities).
Becoming My Own Creditor
To make this work, I view my savings account as a source of credit for myself. Sure, I can take money out of the account (after all, that is why it’s there!), but I force myself to “pay it back” by adding it as a line item to the next month’s budget.
Sometimes the amount I need to use from my savings takes a few months to “pay back,” such as when I paid for the closing costs of my refinancing last year. When I took the $3,700 or so out of my account, I immediately added portions of that sum to the budget sheet for the next few months. That way, whenever I had extra money coming in, I had a tangible, significant goal to put it towards.
This simple tweak of the ‘pay yourself first’ idea helped me to avoid the urge to spending frivolously and is the reason I was able to put the money back within 5 months of spending it!
Buckets of Cash in the Bank
It’s important to point out that these savings account “debts” are prioritized in addition to my normal savings targets. So if I originally planned to save $1,000 that month, I would still have that auto-deducted.
Once my regular savings contributions were taken care of, I’d move on to my fixed expenses. Finally, I would apply any extra money to replacing what I had removed from my bank account in the first place–before spending it on any extras.
Ode to the Naysayer
While some could argue that you could just funnel the money to savings anyway so you don’t have to worry about having such a complicated budgeting system, I remain steadfast in my commitment to this method because it works. I’ve read countless resources that illustrate how we save more when we have concrete goals tied to the effort. If I were just to throw my money in my account willy-nilly, it would be much harder to justify putting back what I spent.
By paying myself back, I’m giving myself that much more opportunity to not only boost my savings for the future, but to also establish sound habits where saving is an automatic priority.
Do you ever pay back what you take out of savings? Or do you just continue saving at your normal rate?