pay yourself first

Live It Like You Mean It
photo shows sunrise over a lake at the Louisville State Rec Area

You may know already: we generally advocate simplicity in most things. Once our basic needs are met, we’ve got some choices to make. So how do we keep things simple?

When it comes to budgeting, this takes the form of “paying yourself first.” You save and invest to meet your goals, and then spend the rest as you see fit. No need to track every nickel; you will get where you want to go so long as you’re getting yourself paid.

But it doesn’t hurt to also review your outlays in greater detail once in a while. Fixed expenses are those that cannot be changed in the short run: if you don’t pay the electric bill, the company will shut off your power. You have to pay the bills. Total up these kinds of items. You’ll need to know what sort of fixed expenses you can expect each month in order to figure out how much is discretionary—what’s left over for the things you want?

This exercise can be useful because it may point you to those expenses that are regular but are not fixed. For some, it might be a gym membership that doesn’t get used. It might be a streaming subscription for shows you don’t watch anymore. These services are just a few examples: there are plenty of things in life that we try out or that once made sense but no longer serve us.

And when we root these things out, it’s like giving yourself a raise!

We each have long-standing habits or hobbies whose costs we may not have considered for quite some time. Taking a fresh look at our spending gives us a chance to make intentional choices about how we live, going forward:

  • What are you not doing that you wish you were doing?
  • What do you wish you had that you do not have? A few more adventures, a new skill or pastime, something for the house or the yard?
  • Where might your money save you some time?

And the big question: what would you have to change in order to afford that new choice?

This isn’t necessarily “just” a budgeting question, because rather than shift your spending around, you might elect to invest more each month. All else being equal, investing more means you reach financial independence sooner. Access to options: that’s what we’re buying when we pay ourselves first.

We don’t mean to make any of this prescriptive. After all, you are the one who must live your life—not us! We just suggest that taking a step back to look at where our money goes, being intentional about how we spend, these are things that come naturally when we try to live life on purpose.

Clients, if you would like to talk about this or anything else, please email us or call.

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Live It Like You Mean It – 228Main.com Presents: The Best of Leibman Financial Services

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Sinking Fund, for the Win (Again!)
photo shows jars full for coins with labels for things like travel, education, house, etc.

Some time back, we wrote about the benefits of a “sinking fund” to make for a smoother life, financially speaking. This is a way to set aside money systematically for unpredictable-but-likely expenses, long-range spending plans, and lumpy annual expenses. (When businesses or other entities use sinking funds, it’s usually to lower the level of debt over time.)

My home is (was?) in good shape, but I knew maintenance and repairs were bound to be needed. Furniture and appliances do not last forever, either. My vehicles are in good shape, but someday I will need to pay for a new one.

To meet these needs and more, I arranged an automatic deposit into my brokerage account each month, calculated to—hopefully!—handle whatever might come up.

So far, eight monthly deposits have been made. And wouldn’t you know it, an unexpected home expense has hit.

It might have been the air conditioner or a washer or a dryer. Termites could have popped up or the insurance deductible for storm damage. But the money in my sinking fund can be spent on what is needed, when it is needed.

I don’t know precisely how much it is going to take to fix the problem, but the important thing is that it won’t stress me: the sinking fund has more than enough to cover the issue. Next year when I think about replacing some windows, and many years from now when the roof needs replacing, I’m sure I will feel the same way.

The examples mentioned here aren’t exactly emergencies, but they are sudden. They are part of the fabric of modern life. If you own a home or a car, if you have one of those fragile human bodies, if you live somewhere weather happens… this fund may help you avoid tapping into your emergency fund or resorting to expensive credit to cover something that always could-have-been coming.

So one of the best things about the sinking fund is that I spend less time worrying about the sudden expenses the fund is intended to cover. It took just a bit of thought to set up, then it flies on autopilot. I review it from time to time, and I can always adjust the monthly deposit.

Clients, if you are ready to talk about reducing the stress of unexpected expenses in your life, call or email us.

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Play the audio version of this post below:

Sinking Fund, for the Win! (Again!) – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

Simple or Complicated? You Choose

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The object of a household budget is to end up with control of your finances.

If you Google “steps in budgeting” you will find results ranging from three steps to ten steps. Each one involves accounting for all of your outlays to the penny. The process must be repeated every month, and requires ongoing work to maintain.

Budgeting works well for some people, particularly when money is tight. If you might not be able to afford food unless you pay careful attention, you probably better pay careful attention.

But another, far simpler method works for many others. You pay yourself first, and spend or save what is left over. Paying yourself first can take many forms, but the most fool-proof methods are automatic.

• 401(k) plan contributions at work, by payroll deduction.
• IRA or Roth contributions, by automatic monthly bank account transfers.
• Investment account deposits by automatic bank debits.

You may need to do some arithmetic to see if your monthly investment amounts are likely to get you where you want to go. (We can help with this.) After that is done, all you need to do is pay yourself first!

Some of you enjoy keeping careful records of spending, and we would not discourage that. At a minimum, being mindful about our outlays makes sense. But for others, the simpler method may fit in better to your real life. It is a personal choice.

Simple or complicated? You choose. Clients, if you would like to talk about this or anything else, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

No strategy assures success or protects against loss.

Organize Your Money: The Easy Way or the Hard Way

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Anyone with a passing interest in personal finance has read about the need to know where your money goes every month—to run your finances in accordance with a household budget. If you google “household budget” you will find millions of links. It turns out there is actually an easier way.

A typical budget would include line items for home expenses including utilities, telephone, insurance, property taxes, rent or mortgage payment; auto including payment, repairs, insurance, gasoline; personal items including health care, clothing, gifts, personal care, etc.; and so forth.

It takes a fair amount of time to determine what amounts should be budgeted in each category, and then to track your spending by category each month. Time is what life is made of—we should be careful how we spend it. Especially when there is an easier way. So simple, it fits in three words:

Pay. Yourself. First.

If you always save 10% of everything you ever make for the long haul, you probably will be able to retire at a decent age. PAY YOURSELF FIRST by electing that kind of percentage into employer retirement plan or other long-term investments.

If you put something into savings every payday, you’ll never get caught short by a broken appliance or unexpected home or auto repair. PAY YOURSELF FIRST by putting 5% of income into shorter-term savings. When your savings balance equals many months of income, you can transfer funds to long-term investments.

Depending on your circumstances, you may need to pay yourself more to reach your goals. But the 10% and 5% are a good place to start.

So with the ‘pay yourself first’ method, how much should you spend on everything else, all those other categories of things we need or want? Very simple: whatever is left over after you pay yourself first. Think twice about buying a money pit of any kind—it will imperil your goals. Spend as little as you need to on things that decline in value, like vehicles. And be careful about things that come with monthly bills, like pet horses or satellite TV. Housing and vehicles consume major fractions of our incomes, so make thoughtful decisions in those areas.

As long as you simply pay yourself first, you can get to where you want to go. Or you can do it the hard way: download one of those comprehensive budgets and get to work.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.