You have probably heard “pay yourself first” mentioned as a general strategy for financial success. Many of the cash flow management strategies we recommend (such as Savings-to-Spend) follow this philosophy. Pay Yourself First is a reverse budgeting system that focuses on savings rather than nitpicking every expense as in traditional budgeting. It all sounds great in theory, but you may be wondering how it works in the real world. Below are some simple ways to make this strategy work for you and reduce financial stress.

Know Your Spending/Lifestyle

A key to this type of system is making sure your fixed, routine expenses are always covered. Tracking expenses over time is incredibly helpful to get an idea of how much it takes (in general) to fund your lifestyle. Once your routine expenses are defined, then you need to provide for discretionary and non-routine expenses. If you don’t have solid numbers for more discretionary items, start with an estimate and work from there to refine over time. 

Automate Savings 

A 401k or other retirement account is an excellent example of Pay Yourself First. Since money is deducted from your paycheck before it has a chance to hit your checking account, this is a painless way to stay on track to long-term goals. The key to this step is to automate as much as possible. Once savings is at least one step removed from the main spending account, it is easy to see what funds remain for discretionary spending. Some examples of how to automate savings (amounts and types depend on specific goals, but the below is a general order of importance):

• Emergency Funds – this is where the Savings-to-Spend account provides a double benefit. Simply add up your non-routine, big ticket items from the first step (i.e. vacations, home maintenance, car replacement) and divide them by 12. Set-up an automatic draft from checking (or directly from paychecks) to make sure there are always funds available when needed.
• Retirement Savings – In addition to automatically funding an employer retirement plan, the same concept can apply to other types of accounts. Setting up monthly EFT drafts from checking into an investment account is a great way to supplement savings and meet your retirement goals.
• College savings – Similar to retirement savings, monthly drafts can be set-up for 529 accounts or investment accounts to meet college savings goals. 
• Large purchases/other goals – If you are saving for a house or other big-ticket item, set-up an automatic draft to a savings account. 

While debt payments are not savings, the same concept applies. Set a goal for pay-off and stick to the monthly payments needed to get there. It is motivating to see the debt balances decrease each month. This will also free up more cash flow for future savings once the debt is paid off.

If you find that you have a hard time prioritizing savings, I encourage you to find ways to pay yourself first. You may be surprised at what you are able to do with a system in place.

Mary McCraw, CFP®

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