Paying yourself first

chess, metaphor, board

In Personal Finance there is a spectrum for how people handle saving. On one end, there is the spenders. On the other, there is the savers. Being too extreme on either side is not good for both your personal finances and your lifestyle. If you fall into either of these categories, the “pay-yourself-first” strategy to saving might be for you.

What is Over-Saving?

Over-spending is an obvious issue. Spending money you don’t have can create all sorts of problems. But how is over-saving a bad thing? Too much of anything can make a good thing bad. If you are exceeding your savings goals and the thought of spending money to go out to a movie for the first time in months gives you anxiety, you might be an over-saver. If you save hundreds of dollars a month, but buying your favourite starbucks coffee for $5 makes you feel guilty, you might be an over-saver.

Pay yourself first

This method to saving is simple: you set aside the money to meet your savings goal, and you spend the rest. If I needed to save $200 out of every $2,000 bi-weekly cheque I received to meet my savings goal, I would have $1,800 to spend.  When I receive my paycheque, I take the $200 into savings right away – even better if you have an automatic withdrawal setup. For Over-Spenders, this takes the money away before they can spend it. The thought is, if they never had the money, they won’t be able to spend it. If they are racking up debt instead, that’s another problem. For Over-Savers, this doesn’t allow them to save money that isn’t required to meet their goals. The thought is, if there is money that can’t be saved, there will be less guilt and anxiety if you do spend it.

John Smith has a Savings Goal of $400 a month on his $4,000 monthly income. Unfortunately, John is an Over-Spender. As long as there is money in his account, John will spend it. So John set up an automatic withdrawal from his account for the day he receives each cheque. The automatic withdrawal will move $200 per cheque from his spending account to his savings account. In the months after doing this, John still spends the entirety of his spending account every month, but he is saving $400 due to the automatic withdrawals taking the money away before he can spend it.

John Smith 2.0 has a Savings Goal of $400 a month on his $4,000 monthly income. Unfortunately John Smith 2.0 is an Over-Saver. He only spends money on necessities and feels extreme guilt whenever he buys something that isn’t a need. John knows he shouldn’t feel this way, so he starts to “pay-himself-first” John decides to setup an auto-withdrawal of $200 per cheque to his savings account. The rest will go into his spending account. After 3 months, John still isn’t spending much more, but as he sees his spending account getting bigger and bigger, he feels much less guilt going to buy things. Eventually, over time John starts to get healthier spending habits and does not feel guilt if he goes out for dinner or the bar with his friends a couple times a month, as long as he continues to meet his savings goals.

This is one strategy that will help you build a positive mindset towards money and reduce the stress it causes you. It might be the one for you, it might not. The important thing is to find a good strategy that suits your personality. The success of your finance goals depends on staying motivated, and having a saving strategy that compliments your personality is the first step towards staying motivated.