The "Pay Yourself First" Budgeting Method
Don't Want a Line-Item Budget? Try This Fun Alternative
If budgeting sounds boring, it might because you're going about it the wrong way.
When most people think about formulating a budget, they imagine a strict line-item budget that details the precise amount they need to spend on groceries, gas, utilities, restaurants, and other expenses.
For example, the traditional formula for budgeting might ascribe an allotment of $200 a month for clothing, $100 a month for dining out, and $350 a month for groceries and household cleaning supplies.
Type A versus Type B Personality Budgeting
Creating and maintaining a strict line-item budget is highly structured and time-intensive. Designing this type of structure works well for the methodical, highly-organized Type A If you fall into this category, you are very detail-oriented, are aggressively paying off your debt, or you're saving with a particular goal in mind. You're also highly motivated to optimize their finances.
However, other personalities have a tough time developing and adhering to this kind of structure.
If you tend to be a big-picture person rather than a detail-oriented person, that means you are a Type B personality, and you should try the alternative Pay yourself first method.
How to Develop a "Pay Yourself First" System
The "Pay Yourself First" way of budgeting begins when you write down how much you bring home. For example, let’s say you earn $4,000 per month in take-home pay, after taxes.
After writing down your net monthly pay, write down your savings goals. You might decide you want to put aside the following:
- $400 a month for an individual retirement account
- $200 a month to put towards buying your next car in cash
- $100 a month to put towards future car repairs
- $200 a month towards future home repairs and maintenance
- $50 a month to pay for an annual vacation
- $50 a month towards future home, auto, and health insurance deductibles and co-pays, which you might want to consider an emergency fund)
- $200 a month (or more) to pay for your kid's college education, depending on their
That's $1,200 a month you need to put into savings.
Subtract the $1,2000 from your monthly net income of $4,000. You’re left with $2,800 per month. You can spend this money freely, without regard to what category it falls into.
The Top-Down Approach
This system is really easy because you don't need to worry about what percentage of your money is going towards your rent vs. groceries vs. electricity. Just pull your savings from the top and then relax and live on the rest.
This "anti-budget" feels antithetical to the traditional budgeting model, but it's equally effective.
The entire point of a budget is to make sure you're hitting your savings goals. The traditional, line-item budgeting model is a bottom-up approach. The "Pay Yourself First" method is a top-down approach. Both are fine. Personal finance is personal, so choose whichever style works best for you.
In the “pay yourself first” budgeting method, you simply pay into your savings first and then spend the rest.