Paying Yourself First – The Modern Way of Budgeting

During the year, we all evaluate our spending to find opportunities where we can cut back expenses. As with most of us, we find areas where “needs” versus “wants” clash but we are unwilling to make the change and cut back even if it leads to better health and a better life in general. A different philosophy to budget planning is the idea of paying yourself first. Now, let me be clear, paying yourself first does not mean taking yourself out to that fancy dinner or leasing that expensive car. In fact, paying yourself first is the exact opposite. Paying yourself first entails securing your financial future first before budgeting for daily expenses and definitely before thinking of acquiring liabilities.
Let me give an easy to understand example. Let us say Bob or Jill receives his or her paycheck, the first thing that comes to mind is using a portion of the paycheck to pay bills and then using another portion of the paycheck to try out a new restaurant or to purchase tickets to an event. Using the “pay yourself first” ideology, the first thing a portion of the paycheck will be used for is contributing to a 401(k), IRA, real estate property down payment, HSA, REITs, Stocks, Bonds, and other business ventures with the goal of maximizing the contribution to those areas. Whatever is left over is then used to pay off monthly bills. This leaves very little for discretionary spending and eliminates wasting the income earned. Instead, the income earned will be used to generate more income because as we all know – money never sleeps, it keeps working as long as you put it to work. If you are unable to pay off all your monthly bills with this method then this would suggest downsizing in some areas, for example, moving to a less expensive rental apartment or downsizing to a less expensive home.
There are numerous excel tools that can make it easy to compute your budget using the “Pay Yourself First” methodology. A personal finance tool that you probably should be using is Personal Capital. The tool is an exceptional resource that provides insights into your spending, expense, income and monthly cash flow for FREE!


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