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Pay Yourself First Budgeting: Build Automated Savings and Investment Into Your Budget

Easy tip for maximizing savings and investment with minimal impact on your quality of life

By Sudhir SahayPublished about a year ago 3 min read
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Pay Yourself First Budgeting: Build Automated Savings and Investment Into Your Budget
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Saving and investing is a key part of managing one’s finances. Today’s post is about a simple way that will make it easy for you to save and invest the largest amount of money without impacting your quality of life.

Pay yourself first and automate your savings and investments

Last week, I wrote about the simplicity of the core idea of how to successfully manage household finances (A Simple Formula for Long-term Financial Success (Visualized)). In the article, I described excess income — where excess income is the amount of your income that exceeds your expenses — as equal to one’s savings and investments. Successful financial management aims to maximize this excess income.

A dear friend and thoughtful reader sent me some feedback saying that he agreed with my views on the three parts of managing finances. However, he suggested that a base level of savings should already be included in one’s budgeted expenses. This type of budgeting is called a “pay yourself first” budget and makes it more likely that you will maximize savings and investment. He makes a good point for the following reasons.

You can’t spend money you never had

One of the biggest challenges that people have with saving is psychological — when we have money in our hands, we are very likely to spend it. A pay yourself first budget ensures that the money never figuratively gets into your hands so there is less temptation to spend it. As the section header above states: you can’t spend money you never had.

Automation makes it easy

By setting up automated transfers to each of your various savings and investment accounts, it makes the entire process of savings easy. It’s less work as you only only need to set up the process once. In addition, you will never forget to make the savings as that happens on its own.

In my household, we practice pay yourself first budgeting and have set up two layers of automatic savings and investments:

  • Automatic deductions from my wife’s and my paychecks to each of our 401(k) pensions: As I shared in Make Your Pension Contributions, contributing to your pension has the added benefit of tax-advantaged investing and free matching funds from our employers. In keeping with the ethos of “you can’t spend money you never had”, these dollars never even make it into our bank account
  • Automatic transfers from our bank account to our savings and investment accounts: I set these up to take place right after our paychecks are deposited. While these dollars do make it into our bank account (so I do technically have them “in hand”), they are transferred away very shortly after we get paid

Recalibrating pay ourselves first budget periodically

Our goal is to maximize our savings without negatively impacting our quality of life. As I described in Budgeting Is a Foundational Requirement for Achieving Financial Success, budgeting is an iterative process. Over time, as our income and/ or expenses change, we need to recalibrate. In an ideal world, our excess income increases and we can recalibrate by shifting this excess income into increased automated savings and investments. By doing this, we maximize our savings and investments, but don’t really impact our quality of life as we’re only shifting excess income. We typically recalibrate our budgets annually, but would suggest a more frequent cadence if you are relatively new to budgeting.

This completes today’s post on the simple formula for long-term financial success. The practical steps you can start taking from today’s post are:

  • Build savings and investment as a line item into a pay yourself first budget: Savings and investment should be an explicit line item in your ongoing budget as described in my article Budgeting Is a Foundational Requirement for Achieving Financial Success
  • Automate your savings and investments: Set up automatic withdrawals from your pay and bank account for each of your savings and investments. This maximizes savings as you can’t spend money you never had
  • Recalibrate automatic savings and investment amounts periodically: Update your budget iteratively to maximize your savings and investments

Thank you again for joining me on my journey to build financial literacy for young adults and their families. Please share any comments or questions that you have in the comments section. If you are interested in reading more of my posts, please access my author page (https://vocal.media/authors/sudhir-sahay) where you can see all the posts I’ve published. Also, if there are any topics you’re interested in my broaching in future posts, please let me know. In addition to the comments section, I can be reached at [email protected].

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About the Creator

Sudhir Sahay

Sudhir Sahay is a Sales and Marketing executive and a father of two young men. Sudhir hopes to share his journey building basic financial literacy for his children and providing savings and investing advice to their friends and peers.

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