Thursday, December 08, 2005

Budgeting Made Easy 1 of 4: Electronically Pay Yourself First

This is the first of a 4 part follow-up to my post on Budgeting Made Easy. In these four posts I'm going to explain the four steps in more depth, and explain the rational behind each of them.

Ok, here we go. Step 1: Electronically Pay Yourself First.

Pay yourself first is one of the most common mantras out there in the world of personal finance. It says make sure that saving is the first thing you do each time you get a paycheck. I think it works so well because our spending habits are like goldfish, they expand to fit the size of any wallet. If we have money we spend it, if we pay ourselves first we don't have the money to spend.

Back in my parent's day this meant that the first check you write each month went to their IRA (or at least it was supposed to). But now, through the miracle of modern banking, you can set up automatic savings to come out either directly from your paycheck or directly out of your checking account as soon as the check is deposited.

This is perhaps the greatest tool for building financial wealth I can imagine. At once you save time, remove the temptation to overspend, and increase your investment portfolio.

Following that, automatically pay your other bills too. It will end up paying you back over the long run when you don't miss a payment triggering late fees and hurting your credit score.

If you take this a step further and establish a separate account for food, gas, and other essentials then you know that whatever money is left is fun money (the reverse also works: set up a fun money account and only pay for entertaining, entertainment, and fun with that money).

Automatic Transfers/Payments are a great tool for automatically organizing your finances. There is no limit to the number of automatic transfers you can set up (unless your bank is stingier than mine) and most banks will do them for free (it is cheaper for them to send an electronic signal than to process a check).

I know this post isn't rocket science, but think about how long it would take to set up autopay for all of your bills and yourself. Then think about how much time it takes to pay bills: write checks, buy stamps, worry about getting it done on time... The only way someone as scatter brained as me is able to get their finances in control is by automating them. I'd rather spend those two hours a month doing something else.

Step 1 summarized: Pay yourself first. Invest that money. Auto Pay Your Bills. Have fun with the rest.

Budgeting Made Easy Series:
Budgeting Made Easy Overview
Budgeting Made Easy 1 - Electronically Pay Yourself First
Budgeting made Easy 2 - Buy Quicken


Loi Tran said...

Automatic investing is good for people who cannot control their spending or investing in their 401k. Money not seen is money that is not spent. It's easier to invest automatically because people are lazy.

Jared Iverson said...

Great post. I agree that paying yourself each month is paramount for anyone wanting to accumulate wealth. I have a simple system that takes a percentage of my income each month and then I set that aside in a money market account, only to be used for investing and buying assets.