August 10, 2024
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Learn moreMost people create a budget around their expected expenses. A pay yourself first approach can help you change the way you spend and save your money.
Paying yourself first means that your budget is built around savings goals instead of mandatory and discretionary spending. In this form of reverse budgeting, a portion of your paycheck is routed to a savings goal, like an IRA or paying off a credit card.
What’s important about reverse budgeting is that you truly do pay yourself first before you think about how much money to set aside for bills. Because this money move happens first, you’ve paid into your savings—like an IRA, life insurance, health savings account, emergency fund, or paying off debts—before you’ve even considered using the rest of your paycheck for expenses or created the rest of your budget.
If managing money isn’t your strong suit, and you find yourself living paycheck to paycheck, even though you have a steady salary and manageable expenses, paying yourself first might be a great way to keep your spending in check and build up some savings.
Paying yourself first means that a portion of your income is automatically routed to savings. If you’re the type of person who spends money as soon as you get it, this can help you focus on the big picture and reduce impulsive spending. Paying yourself first works because it forces you to cut back on discretionary spending when you have a more limited amount. It keeps the money from burning a hole in your pocket.
Automation is a great way to pay yourself first. Route a portion of your paycheck into savings, and have the rest go into your bank account as it normally would. This lack of interaction can cause you to adjust your spending on what money is readily available. Another tip is to have your savings be in an account that isn’t linked to your main bank account; it won’t be visible when you check your balance and won’t act as a temptation.
Reverse budgeting is a hands-off approach to savings but setting it up for the first time requires some planning and understanding.
Paying yourself first is a great option if you have trouble saving money and prefer a hands-off approach to saving. Automating your savings can make this approach to reverse budgeting even more streamlined. By being proactive, you can eliminate unnecessary spending and reach your savings goals.
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