This Simple Budget Tweak Helped Me Save Thousands

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?

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  1. I tend to save as much as possible all the time. My boss, however, bought a car and now he is making a “car payment” to himself until he is able to build that account up to where it was.

  2. I always pay it back if my savings dips below a certain point. I think it’s just a psychological thing!

  3. We do use our general savings as a “credit line” like you said, but I don’t think we make any special effort or adjust our budget to pay ourselves back faster. We have a “pay yourself first and last” model where all money left over in our checking at the end of a budget cycle is swept into a savings account. If we owed ourselves something from the general account the leftovers would go there, if not they go into Travel. That is, of course, in addition to our normal saving that happens at the beginning of the month. I think your method is a good one – we just don’t have large expenses that we would be able to pay back on top of our normal savings rates, which are aggressive.

  4. That’s awesome Jen! We do it very much the same way. It may take us a few months to get the amount paid back but we always work hard to get it paid back. I think it may be largely psychological, but it helps us sleep at night.

  5. Always pay my family and myself first. If we don’t have the money for it without touching savings we don’t get it unless it is an emergency which we have the separate account for. Automatically paying oneself is the best way not to spend money and to save. I believe if you take the money out you need to put it back.

  6. I never thought of my savings as a line of credit, but after reading your post I guess I do treat it like one! I hate seeing the amount go down, so I always do my best to make sure it goes up after a purchase. I would never deplete it (even if just a small amount) and then let it sit there.

    Maybe after I pay off my student loans I will try a more intricate system like yours, when I actually have bigger goals like traveling and a house in mind.

    • I hate that feeling, too! Watching my money sink away, even if I planned for it to happen, just leaves me with more motivation to put it right back. Let us know if you give this method a go and how it works out. 🙂

  7. I very rarely withdraw from savings. Using the savings for the purpose you intended is not a withdrawal. Are you suggesting to continue the savings after you reach your goal? I usually have a new goal to replace the old one.

    • Basically, I always replace the savings no matter if it was a planned use or not (I replace my e-fund, and I create a “bill” to myself to slowly put back the long-term savings I use for my goals in addition to my normal deposits). I re-pay the old goal while working on the new goal.

  8. I love this post! My husband and I LOVE this system! This is the main reason for my “Minor Emergency Fund”. It’s mainly a “line of credit” from Bank de Christine. LOL. I would much rather borrow money from myself than a bank or creditor!

  9. Do I pay back my savings? No, we just continue to save. We don’t really get into our savings per say as we save for projected expenses every month. That money is used for those expenses. In the event of an emergency and we use the emergency savings, we use them and continue building it up. We pay ourselves first as one of our incomes goes straight to investments and emergency savings every month. That is what has helped us to save enough to pay off our mortgage which we are in the process of doing now.

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