What is priority budgeting? It can help you save for retirement


When you hear the word “budget,” your first thought may be all the money you’ll need to set aside to pay others. But not all budgets prioritize spending categories in the same way. The pay-it-yourself budget includes a line item at the very top of the list for what might be your biggest spending category: you.

What is a self-paid budget?

Where other budgets might require you to allocate funds to pay categories of expenses first, such as your utility bills or groceries, a self-pay budget (sometimes called a reverse budget) prioritizes categories of expenses. savings based on goals like retirement and investments before tackling short-term expenses.

“By paying yourself first, you can avoid some of the common barriers to saving, like overspending and not having enough money to save or simply forgetting to put money aside to save while you’re concentrating. on other goals,” says Heidi Johnson, Director. in behavioral economics at the Financial Health Network.

Of course, with every fiscal strategy, there should be some balance. You need to be realistic about how much you can comfortably afford while still covering your basic cost of living.

How to create a pay-it-yourself budget

When you’re building a budget that’s focused on paying for yourself, you’ll need to start by changing your mindset to focus on the idea that this budget will be centered around your long-term savings goals, not your short-term expenses.

If you’re looking to try the payout strategy for yourself, here’s how to get started:

  1. Calculate your income. Before determining how much you have to save and cover your expenses, you need to have a clear idea of ​​how much income is flowing into your bank account each month. If you don’t know it off by heart, comb through some of your most recent pay stubs and bank statements to determine the exact amount of your pay checks, side business and investment income. .
  2. Decide what your savings goals are. Think beyond covering the cost of your daily or even monthly expenses. Ask yourself what your long-term goals are and how much you need to save each month to reach those goals in the desired time frame. Your goal may be to retire early or save enough to buy a house. Once you figure out what you’re saving for, you can set aside a specific amount for those goals and then use the remaining funds to cover day-to-day expenses, like your next car insurance payment, rent, utilities, etc. , and groceries.
  3. Choose a savings vehicle. Deciding where you will put your savings is just as important as deciding how much to save each month. The account you put your savings in can play a huge role in how quickly you are able to achieve these goals. Pro Tip: You should opt for a high yield savings account so that your savings continue to grow over time.
  4. Periodically reassess and make adjustments. Although some budgeting strategies require less maintenance than others, you should still plan to review your budget periodically to determine if this strategy is still working for you and adjust your savings goals to account for changes in your income, your debts or expenses.

“The amount of money you save will vary from person to person depending on your income, goals, and other circumstances,” says Kendall Clayborne, Certified Financial Planner at SoFi. “To determine how much money you can save, I recommend you start by looking at your current fixed expenses and spending habits. You can then break down your goals to determine how much you need to save to reach your goal versus how much that you might want to spend.”

Here’s what creating a payment budget on your own might look like in practice:

Let’s say you take home $3,000 every month, after taxes, and your two main savings goals are saving for a down payment on a house and accumulate six months of living expenses in your emergency fund over the next 12 months. In order to reach your savings goals over the next year, you will need to save the following each month:

  • Total emergency fund goal: $10,000
    • Amount needed to reach goal: $3,000
    • Monthly savings goal: $250
  • Total down payment goal: $35,000
    • Amount needed to reach goal: $4,000
    • Monthly savings goal: $333
  • Total monthly savings goal: $583

This means that after investing $583 in your savings and emergency fund, you have $2,417 left to cover your daily expenses.

Is the pay-it-yourself budgeting method right for you?

Like most things, this budgeting strategy will depend on your circumstances and finances.

One of the advantages of using this budgeting method is that it is quite convenient and only takes a few minutes to set up. So if you’re looking for something simpler, this might be a good option for you.

And once you’ve figured out your income, savings goals, and how much you feel comfortable putting in your savings account, turning those plans into action is as easy as automating your savings in your account. existing bank. You can usually do this through your online banking account, mobile app, over the phone, or in person at your bank branch. All you have to do is select how much you want to transfer into your savings and how often those transfers should be made, and then you’re set.

“You can set up direct deposit so that a portion of your paycheck each month goes directly into your savings account,” says Clayborne. And if you think keeping your savings accounts and checking accounts under one roof might tempt you to overspend, you can also opt for a bank account at another bank to keep things separate and keep working towards your goals. .

Pros and Cons of a Prime Budget

Not all budgeting methods will work for you. Weighing the pros and cons of this method can help you decide if this is the right strategy for you or if you need to go back to the drawing board.

Pro: A priority payment method reinforces a savings mindset. Rather than tallying up all your day-to-day expenses and then seeing what, if any, you have left over for your savings goals, you prioritize those long-term goals first and make sure they don’t get out of hand. not.

Pro: This type of strategy requires you to be strategic about how you use the funds you have left and to live within your means. This reduces the likelihood that you will fall victim to an inflation trap and let your savings goals fall through the cracks.

Versus : If you have high-interest debt, this strategy could make it harder to pay off those balances. In these cases, you may want to prioritize reducing your debt before tackling your higher savings goals.

Versus : It can be difficult to predict how much you will need to save for unexpected expenses and you don’t want to create a situation where you are constantly withdrawing money from your savings or risk incurring overdraft fees, because it is difficult to anticipate the amount you should keep in your checking account. “Most people perceive past expenses like a flat tire or a child needing braces as unusual, so they don’t consider similar expenses in the future,” Johnson says. “This can lead to an overly optimistic budget.”

The take-out sale

If the idea of ​​maintaining spreadsheets and constant calculations has turned you away from traditional budgeting methods, the pay-it-yourself method might be a viable option for you. It’s easy to set up, maintain, and adjust as needed if there are major changes in your income or financial priorities.

“This strategy usually works best for people who are tempted to spend money if they see it in their checking account,” says Clayborne. “By transferring the money to another account and not seeing it as available to spend, you can trick yourself into saving painlessly – out of sight out of mind.”


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