Is this the best budgeting method for you?
Taking care of your budget is a lifestyle, and unfortunately, not many people are aware of this. When you decide that you want to start budgeting, you need to remember that this is something that will take a while until you see its effects, and also you need to be consistent. As with any other matter, consistency is key.
If you want to be responsible for your budget, the best idea would be to look into some already existing budgeting methods. These are thoroughly researched strategies people put in place over time, and most of them are amazing if you truly want to see results.
If you are confused about what budgeting method is right for you, we are here today to tell you more about the “pay yourself first” method. This is not a traditional budgeting method, and what makes it so special is its flipped perspective. Your focus will be on your savings and not on your expenses.
If this sounds intriguing and you think you’ve finally found something that suits your lifestyle, keep reading to find out even more. This is the “pay yourself first” method with all of its pros and cons.
The meaning of “pay yourself first”
Sometimes this budgeting method is also known as “reverse budgeting,” and it is all closely tied to how this strategy works. You no longer target the expenses. They are on the secondary plan. All that matters now are your savings.
As soon as you receive a paycheck, you take an amount of money from that and place it directly into your savings account. Yes, this is all you have to do, and you will start saving more. This simplicity is also what makes this budgeting method so effective.
For example, you can do something as mundane as setting up an automatic savings account at your bank, and you are all set; you’re actively using the pay-yourself-first method. You can also move the money manually into the savings account, and the result is almost the same. What matters is that before everything else, you first take care of your savings. They are the priority, and all the expenses are now something secondary.
This method helps you create a healthy saving habit, and this is essential in the long run.
How to apply this method
First of all, you need to calculate your take-home income. This is the money you get after you’ve paid your taxes and your health insurance or other such benefits. In case you are employed somewhere, this amount of money will be automatically deducted so you no longer have to bother.
After all of this is clear, it is time for the most important part of this budgeting method: you need to decide how much you are going to pay yourself. Financial experts say that saving 10% to 20% of your income is the ideal number, but you can adjust this however you want. However, it is better to not always save at least 10% if you want to see progress.
As we already said, you can manually transfer money into your savings account, but making everything automatic is more efficient. This helps you stay consistent no matter what. If you forget to transfer the money, the automatic function will never do that.
One thing many people forget is to review their savings plan. You should do this once every six months because your life is constantly changing, the economy does the same, and if you have a specific goal in mind, you need to try to adjust your saving strategy accordingly.
What types of accounts do you need?
If you want to use the pay-yourself-first budgeting method and you also want to maximize your financial growth, you need to choose the right type of account. You know this: different accounts, different benefits, and only a person who has the right knowledge is able to make the right choice.
Planning to save for retirement? Then a 401(k) or Individual Retirement Account (IRA) is the perfect choice. These accounts offer tax advantages and help you build a secure future.
If you want to create an emergency fund, you have two options. You can create a Traditional Savings Account or a High-Yield Savings Account. The first one is probably the most accessible option, but it doesn’t offer high interest. If you want higher interest, you can go with the second option because it gives you more growth potential than a traditional account.
Medical expenditures can be paid for tax-free using an employer-sponsored Flexible Spending Account (FSA), but the money has to be spent within the year.
The type of account you choose is based on your financial priorities. Think about what makes you want to save money and decide which one is the perfect match for you.
The pros
Before starting anything, you probably want to know more about what advantages you get. This is the best approach, and we want to tell you more about the pros of the pay-yourself-first method.
What makes this budgeting method so great lies in its simplicity. You don’t need time and effort to understand how to apply this. Even more, if you make it all automatic, your money will be saved, and you don’t have to do anything.
Also, when you start paying yourself first, you prioritize your savings, which statistically means you will probably save more. If you save more in a shorter amount of time, you can also build an emergency fund faster.
Even more, your progress is steady. Every month money will go into your savings account no matter what. You just live your life, and your savings will keep on growing.
The cons
So, this method implies that you will need to put money aside every month. If you are already living paycheck to paycheck, doing this might feel like a burden. This approach may be excessively restrictive for some individuals. Saving money before taking care of the day-to-day expenses is not for everyone.
Then if you don’t have a source of consistent income, applying the pay-yourself-first method is impossible. It can be really difficult to save a specific amount of money every month if your income fluctuates. Or, you can try to save, but you will need to adjust the savings rate more often.
Is this method right for you?
If you want to build your savings accounts for a stable future, you can consider the pay-yourself-first method. It is more relaxed compared to traditional budgets that require you to track every single expense and allow you to create a priority out of your savings.
This is the perfect method if you are generally spending first, and then when you want to save some money, this is no longer possible because you have nothing left. The pay-yourself-first method will make you more responsible, and your saving process will become much easier.
Do you want to be better at budgeting? Trying the pay-yourself-first budgeting method can help, but you will also have to be more organized: Budget Planner – Monthly Finance Organizer with Expense Tracker Notebook
You should also read more about: The “No” Budget Method
