30 Day Financial Transition Challenge Day 1: Paying Yourself First

Welcome to Day One of the 30-Day Financial Transition Challenge.  Today’s article focuses on the concept of ‘Paying Yourself First,’ which is the first of the ‘Five Fundamentals of Fiscal Fitness.’  If you haven’t started at the introduction, I suggest you do so before going further.

Bottom Line Up Front (BLUF)

Paying yourself first means that you prioritize your savings goals (emergency savings, investments, retirement) before you touch the rest of your discretionary income.  Following this concept will help ensure that you save first then spend what’s left over.

Why? 

Simple.  Most people develop a plan to save a certain amount of their budget, but life tends to get in the way.  Even the most well-intentioned people will find emergent ‘requirements’ that take priority over getting a check over to their IRA.  By paying yourself first automatically, it’s a lot easier to meet your savings goals.  You’ll also find that when you stick to your budget all of those ‘emergencies’ seem to solve themselves or go away.

Goal

Your goal in paying yourself first should be to save at least 10% of your income.  Today’s exercise will help you recognize if you’re already meeting this requirement.  If not, we’ll identify opportunities to get closer to that mark.

You won’t solve the entire problem today, but you should be able to figure out where you currently stand so you can find ways to close the gap as we go through the rest of the program.

The other thing we won’t do today is figure out where this money goes.  Right now, we’re just finding money that’s being underutilized and earmarking it for later.

Relevant articles

What you need

For this exercise, all you need is the past three months’ of credit card statements and your LES or other income documents.

How-to

  1. Figure out where you currently stand with regards to paying yourself first. Calculate your current monthly savings (TSP, IRA, 401(k), emergency savings, or taxable accounts).  Do not count debt payment or other mandatory payments, like insurance, in this number.
  2. Divide your monthly savings by your total monthly income. For most people, this is simply your W-2 salary.  However, the bottom number should also include any other supplemental income such as dividends, second salaries, or rental income.  This should give you your current savings rate.
  3. If your current savings rate is less than 10%, figure out what the difference is. This is the number you should establish as your goal.
  4. Think about what you can do right now to meet your goal. If they really want to, most people can instantly find one or two things that they’re paying into unnecessarily.  This doesn’t mean that you need to immediately tighten your belt.  You should start by making sure that you’re getting the full value of memberships and services that you’re paying for.  If you aren’t, then look into how you can pay for only what you use.

If you’re looking for ideas, here are 5 places to start:

  • Gym membership fees. When is the last time you went to that Crossfit gym?  If you’re not regularly going to a gym but you have a membership, this is a prime target.  Crossfit’s health benefits can mostly be replaced by low-cost exercise activities.  Regardless of the debate, if you’re not committed to going to the gym, you’re not getting any of the benefits, so you may as well stop paying for it.  This move could save you $100 per month.
  • Utility bills. Do you have a feeling that you’re wasting money on electricity or water usage?  Take a look at your bills and see if you could save some money there.  Most electricity providers will give you a free energy audit.  The best thing about an energy audit is that you get a list of low-cost improvements that will have an immediate positive return.  If you save 10% on your energy and water bill, that could be an extra $20 to $30 per month.
  • Cell phone usage. Take a look at your past 4 months’ cell phone usage.  Are you paying for bandwidth that you don’t need?  Conversely, are you paying overcharges because you keep going over your limit?  Take a moment to look at this and adjust your data plan.  You might save an extra $20-$30 here.
  • Membership-based services. Do you pay an annual membership fee for a service that you don’t use?  For example, do you pay into BJ’s AND Costco, but only use one?  Cut out the other one and calculate that cost into your savings.  While this is only $50-$60 per year, it might be worth it, especially if you’re only using one.
  • Cutting the cord. Have you signed up for Hulu, Netflix, and Amazon Prime in anticipation of cutting the cord, only to find out that now you’re paying for ALL of it?  Now’s the time to fish or cut bait.  Either make the switch, or cut out all the extra content.  This could save you $25 to $100 per month depending on which way you go.

In addition to these examples, there are plenty of ways to find wasted money that you can stop spending.  All you have to do is scan your credit card statements (look at the past three months’ of statements), and look for bills that stick out.  If you find yourself saying things like, ‘I thought we stopped doing that months ago,’ or ‘I didn’t know we signed up for this,’ those are easy places to start.

  1. If you can’t find easy ways to cut your spending, look at what you can live without. However, instead of just cutting entire budget categories wholesale, take a look at your monthly budgets, and see if you can reduce the amount of spending in one of the major items (groceries, clothes, restaurants, or other discretionary spending.  Some examples include:
  • Eating out. Our family has a tradition of eating out once per week.  For a family of 5, a typical meal (not fast food) usually runs around $80 to $100 (I like beer).  Our monthly budget is around $400.  Instead of going cold turkey, we could:
    • Substitute eating out with a pretty cool home cooked meal.  For example, we like making pizzas at home.  For about $20-$30, we could get all the pizza material and really cool toppings like gourmet olives and artisan cheese.  Or we could get steaks and grill out…that would cost $30-$40.  Doing this every other week would end up cutting the monthly cost by over $100.
    • Save the drinks for home. It’s nice to have a glass of wine with dinner.  But when you’re out to eat, having one or two drinks could cost you as much as a third of your meal.  Have a cocktail before (or preferably after) your dinner and save some cash.
  • Clothes.  I’ve got to admit, I don’t do the clothes shopping in my family, so I won’t comment on how much clothing you and your children need (although my wife says it’s a lot).  However, if you know that you can get the same clothes at an outlet store or online for much less, why would you ever pay retail prices?

Whatever it is, you might be able to find some room for opportunity to make up that difference just by making sure that your money buys things that you value.  If that doesn’t make up the complete difference, don’t worry.  Throughout the month we’ll see if there are other opportunities to put cash in your pocket.  For today, there’s one last step.

  1. Make plans to save up your pay raises. If you’re separating or retiring within a year, you might not be able to do this.  However, if you’re still 2 or more years out, this is worth looking into.  You get a pay raise annually (albeit very small).  Additionally, you receive pay raises with each promotion and time in service raises every two years (for the most part, although they cap out at various points based upon paygrade).  If you dedicate 50% of each pay raise to your savings goal, you should be able to reach 10% relatively quickly.  The best part is that most of our pay raises are projected well in advance, so you can put this into your schedule and track it accordingly.

Conclusion

To wrap up today’s focus on paying yourself first, you’re going to:

  • Figure out where you stand
  • Figure out how you can free up money to save
  • Schedule future pay raises to meet your goal

We’re not going to put this money towards anything YET.  Over the next month, we’ll identify opportunities to properly use this money.

In Day 2, we’ll discuss the importance of liquidity, and what you can do to make sure you have the right amount of savings set aside for emergencies.

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About Forrest Baumhover

Forrest Baumhover is a Certified Financial Planner™ and tax professional. His firm, Westchase Financial Planning, focuses on the unique financial planning needs of servicemembers and families looking to separate or retire from active duty.

If you’d like to learn more about Forrest or his services, please check out the About Forrest page at the top of this article.

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One Response to 30 Day Financial Transition Challenge Day 1: Paying Yourself First

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