Here’s the thing about budgets which you may not know about: these are mostly built around expenses. However, there is a model of budgeting that is more rewarding. It is called the Pay Yourself First model. This is a reverse budgeting strategy because it flips the switch on most budget models. In the Pay Yourself First model, the spending is all around your priority goals such as retirement. Fixed and variable expenses take a lower priority here.
In this article, we shall learn how to make this work for you.
This budget model is such that it prioritizes savings, but that should not be done at the cost of sacrificing necessary expenses like utilities, housing, insurance, and the like. To make the Pay Yourself First model, here is what you need to do.
Assess your spending patterns: Just like everything else in life, you need to prepare if you want to make the Pay Yourself First model successful for you. Experts recommend that you review your latest spending patterns and details, including that of your bank and credit card. Start out conservatively since you can increase your savings later anytime. What you don’t want to risk is an overdraft or a bounced check.
Find out how much you want to pay yourself: Here is where it all gets interesting! Use the 50/30/30 planning model. Under this planning model, 50% of your monthly income goes to necessities, 30% to meeting wants, and 20% towards meeting debt repayment and savings. If you use this planning model per month, you’ll be surprised how much you save.
Find out what your income goals are: Make a list that shows what your short term and long term income goals are. Your first priority should be to save up for your retirement and to build your emergency fund. The next priority should be towards travel and major purchases. Contribute just a small amount towards each goal. Alternatively, you can focus on a couple of goals first, and once they are done with, focus on others. But first, you need to find out how much you need to save up for these goals. Saving for all of them won’t be equal, which is why the 50/30/ 20 method is so effective.
Be flexible: This means that you should adjust when you need it, and not be rigid. When it comes to your budget, do anything but be rigid. If you feel that you are not saving up enough for something, cut back on others if it’s so important.
In the end, it all centers on you. What works for you, and what does not.