“Pay Yourself First” Is Missing The Word Budget

Picture This – You Have Bills To Pay

The due dates have arrived for your car payment, your mortgage, your rent, your utilities, you’re buying groceries, and every other thing we all pay for. You would love to pay your debts, but you’ve got a problem. You got your paycheck and you’ve already ‘paid yourself first.’ Whoops. Guess you don’t have to pay the bills though… right? Wrong. Very Wrong. You’ve got day to day obligations and debt you’ve got to pay. 

But you have all your debt paid off? Oh okay – congrats you’re one of the few Americans who doesn’t have any debt (mortgage is also debt FYI). In that case paying yourself first might be easier, but you still have some day to day necessities like utilities, subscriptions, property taxes, and more. 

The point I’m trying to make is the blanket statement of “Pay Yourself First” can be harmful if not used in conjunction with things like budgeting.

What Pay Yourself First Means

Without reading much into the details and hearing an explanation of what this is supposed to mean, one might assume it means literally to pay yourself first after you receive income. Potentially to the detriment of paying bills or other things. Feeling like giving yourself a bit of extra discretionary income this month? Just Pay Yourself First! As the example above states, paying yourself first without any care to other bills and budget will cause financial duress. What paying yourself first was supposed to mean as per Paying Yourself First (1984 first published), The Richest Man in Babylon, Rich Dad Poor Dad (my first finance book), and many others was…

An investor mentality that means to automatically route specified savings and investing contributions from each paycheck at the time it is received as budgeted.

The really important part is ‘as budgeted.’ Paying yourself first doesn’t work unless you have budgeted for the savings and investing monthly. This clearly doesn’t work unless there is cash to do so. That means any amount of debt, unexpected bills (emergency fund), uncontrolled discretionary spending (retail therapy), and other things that can rack up debt can quickly end the reality of paying yourself first.

How Have I Paid Myself First?

Budget. I remember graduating college and without much education on a clear defined budget I had to figure it out. I used an old school way of 50% goes towards living expenses, 20% to savings, 20% for retirement, 10% for discretionary or something along those lines. It slowly evolved into higher amounts for savings and investing when I increased my W2 income. After growing my investment portfolio my budgeting transitioned into what I need to pay monthly to live my current lifestyle (also an excellent article on budgeting with a lower income). I am also the type of person now that will dump more into savings or investing if I have extra income instead of dumping into a toy even though I have done that before – everyone spends money on their vice’s.

The other piece to this is that if you’ve budgeted well enough, there are programs at a lot of these banks and brokerages where you can automatically deduct an amount from your checking. Same thing works with your bill pay. I personally don’t do that because I tend to move money around and don’t think it’s the safest thing to leave a ton of cash in your very accessible checking account. I also pay close attention to my finances. You could very well be more organized than me though (not hard to do) and auto pay/invest could be really helpful for your budgeting.

So the TL;DR:

1) I budgeted. Different types of budgeting, but understood the bills I was paying every month and BUDGETED to save/invest. This included an emergency fund so that the unexpected stuff didn’t hit my ‘pay yourself first’ budget.

2) Made more money. Doesn’t need to be W2 (mine was) but you’ve got to increase your income to increase your savings. You can only cut cost so much.

3) Was more frugal with discretionary stuff. I made sure I paid off my debt as quickly as possible and was careful with specific things like buying toys and clothes specifically. A fancy dinner each week wasn’t going to wreck me (this is personal for everyone), but the new fancy motorcycle or clothes each week would definitely catch up to my budget.

It’s “Budget To Pay Yourself First” for me

While my investments have changed, my savings rates have changed, and life has gone in different directions my overall goal has been the same – get to financial freedom with my own investments for me and my family. To do that I have had to “Pay Myself First,” but I’ve had to budget that into my monthly spend. As mentioned, paying yourself first blindly without a budget is clearly an issue. Make those smart choices and always consult your advisors and CPAs on any financial decisions.

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