Paying Yourself First!
by Austin Pryor
May 3, 2006
(AgapePress) - - Years ago, when one of my college-age sons came to me for help in getting his finances organized, the first thing I did was get him set up on a pay-as-you-go basis using the so-called "envelope" system. That's where you cash your paycheck(s) and immediately divide your income into several envelopes, one for each of your major spending areas. When the money in a particular envelope is gone, that means no more spending in that area until the next payday. (Modern technology has enabled us to improve on this approach -- now we use the "Ziploc™ bag system" so all the loose change doesn't fall out!) Here's the process my son used as he worked on building his emergency savings fund. After setting aside his tithe and taxes, what was left was his spendable income. This was the "pie" that he proceeded to "cut" several ways. The first piece of 10 percent went into his emergency savings fund account. Then, the remainder of his spendable income went into envelopes for paying his current bills, debt repayment, and monthly living expenses.
His emergency fund came in handy twice during his first few months using the system -- to pay for emergency brake and transmission repairs. The money in the savings account was used up, and he had to begin building it anew. But having it on hand prevented him from going back into debt to pay for those items. That's why it makes sense to set aside some savings in a contingency fund.
When it comes to saving, despite your best intentions, it's easy to rationalize putting it off until the next paycheck. Too many times, the "savings" envelope goes unfilled. One way to overcome this is to have some of your money put aside automatically before you have the opportunity to spend it. Here are two paths to automated savings:
- Sign up to have part of your paycheck (you decide how much) automatically deposited into your savings account at your credit union or local bank. It's easy, convenient, and offers some useful discipline. Plus, your savings are insured and available for withdrawal without penalty whenever you wish.
- For a higher rate of return once interest rates return to more normal levels, set up automatic transfers from your bank account to a money market mutual fund. Such funds typically accept transfers of $50 and up on either a weekly, every other week, or monthly basis. Most money market mutual funds offer this service; call them and ask for the forms to get started.
Consider a strategy of saving five to ten percent of your gross income when you're in your twenties. Initially, this will go toward building your emergency fund. Once that's in place, your savings can be used for a down payment on a house and other large purchases. (Eventually, the primary use of your savings will be to invest for retirement.) Then, move up to ten-to-fifteen percent in your thirties and forties.
Many couples believe they could never save that much. But let me ask you -- what would happen if a cutback at work resulted in fewer hours and a 10 percent reduction in your income? Wouldn't you make the necessary adjustments in your spending so that you could still cover the basics? Unpleasant though it might be, you would. In the same way, saving a similar amount is not beyond the financial capabilities of most families. Usually, it's a matter of having the willingness to sacrifice and make the necessary changes in one's lifestyle.
Published since 1990, Sound Mind Investing is America's best-selling financial newsletter written from a biblical perspective. To see how their specific saving and investing advice can benefit you, visit them online.
