Pay Yourself First
     

The "Pay Yourself First" Budget

Many people are jubilant if their expenses equal their income, but long-term it will be impossible to save and invest unless your disposable income exceeds your expenses. Americans are always looking for ideas on how to reduce our expenses in order to save and invest. Today's high prices for automobiles, homes, education, vacations, and other necessities or luxuries, make it necessary to make saving and investing a part of your financial strategy in order to reach your financial goals. Like dieting, budgeting (if it means deprivation) only works for the short-term. People often find immense frustration if they need to delay satisfaction (purchasing the things they feel they need or want) for too long before all their budget efforts seem effective.

Budgeting can be simple or complex based on your income and lifestyle. There are four basic points which are worth considering in order to make certain that you develop a budget which pays you first.

Evaluate What You Spend:            Begin the process by recording all your expenses. A simple chart listing living expenses such as: mortgage or rent, utilities, taxes; necessities such as food, clothing, medical expenses, insurance costs, and childcare; and entertainment expenses such as a night of dining out and a movie. At this point, most lists end. However, you must now add one more line and label it "my investments and savings." If you treat investments and savings as an expense which needs to be made on a weekly or monthly basis you are a lot closer to setting the money aside for yourself.

Learn to Allocate Income in Terms of Percentages:                 Once you've calculated the dollar amount you spend on each item, convert that to a percentage. For example, suppose an individual earned $3,500 per month and has a mortgage of $1,200 per month, simply divide $1,200 by $3,500 and the percentage is equal to 34 percent for that one item. By performing this calculation you will soon appreciate the relationship of each expense to your total income. It then becomes a matter of reducing percentages whenever practical. The idea here is that there are a number of expenses that can be trimmed a small percentage at a time.

Categorize expenses as either fixed or flexible. You have discretion over the latter but not the former. Generally, it is the flexible expenses that erode earnings.

Set Up Spending Priorities:            Take your list of expenses and rank them as important, moderately important, or unimportant. Begin by eliminating the unimportant items. This in itself may be enough to begin a modest investment and savings program. If it isn't, eliminate some of the moderately important expenditures, then pay yourself first. And here's what's important. Don't just eliminate the amount, write out a check to a special account and start saving. Where the money goes depends on how much you have. If you begin with two hundred dollars, it might be a savings account or money market fund. If you are planning for your retirement use an Individual Retirement Account (if you qualify) until you've contributed the maximum annual contribution, $2,000.

Most insurance companies and mutual fund companies have established monthly checking account deduction plans that allow you to contribute a fixed amount each month to a wide variety of investment choices. This method also helps establish a more disciplined approach to budgeting for investments.

Exchange Your Low Priority Expenditures for Savings and Investments:   It is often difficult for any two people to agree on which expenditures are more important than others. It is common for couples to disagree on budget choices, especially in two paycheck families. It is primarily a difference in priorities that cause these disagreements. Ideally, you must compromise and negotiate until you sort out the most appropriate and important expenses.

It is wise to periodically review your budget and expense choices, but most important, remember to pay yourself first

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Last modified: 05/03/04