Here’s three simple steps to create a budget that involves paying yourself before paying your bills.
To achieve our financial goals, we need to know where our money is going. This is why having a budget is so important.
What’s even more important is to find a budget that matches your personality.
The pay-yourself-first method is ideal for people who don’t want to track every single expense in their budget and want to increase how much they are saving. It’s also called reverse budgeting because it really doesn’t feel like budgeting at all.
This is how it works:
Step one is to determine your financial goals. Whether it is paying down debt, building an emergency fund, investing for retirement, or all the above, make sure you know what you want to achieve. It sounds easy but it’s extremely important to know where you want to go.
Step two is,once you receive your next pay, before paying any bills, pay yourself first. And that means you set aside the amount of money you want to save and you send it to a separate account. So, before spending anything, you have already paid yourself.
With the money that you set aside, you can now make progress towards your goals, whether it’s to save, invest, or to pay down debt.
Step three is, now that you have already achieved your savings goals, use the rest of your income to pay for your expenses for the rest of the month. Whatever’s left after paying yourself and paying your bills is money you can use for other spending purposes, as long as they’re affordable to you.
That’s it! This is a very quick budgeting method.
Try automating your savings
There’s also a behavioural science tip that can make this method even more powerful: try to automate your savings.
So, when your pay hits your account, make sure it automatically transfers the amount you want to save to a different account. You can generally set this up through your payroll team.
An automatic transfer will make it less likely that you are going to spend that money and much more likely that you will save it. It’s effectively out of sight and out of mind.
The beauty of this method is that you can forget about it, because your savings will be automated.
The bottom line is that paying yourself first works well for some people, because they can easily set it and forget it.
Some people call this method “reverse budgeting”, because it doesn’t even feel like you’re budgeting.
You pay yourself first, make sure you can afford your other expenses, and you’re done!
Your circumstances and retirement goals will play a big part in what you both decide to do. Give us a call at 08 8231 4709 or send us an email at info@centrawealth.com.au to find out how we can help you achieve your financial goals.
Article courtesy of Vanguard.
