Why pay yourself first?

The intent of this is to help you become more purposeful with how your finances are stewarded. Money is one of the key areas that we must practice lots of discipline and there are so many tactics that are used such as, budgeting, investing, saving, and spending. A lot of this can get really confusing really quick. We know that money comes in every month or every two weeks when we receive our pay checks. The last thing we want is for that money to sit stagnant. I love the illustration of a river vs a pond. If all our money came in every month and we had not intentionally placed it or sent it where we wanted it go it would just sit in the pond. Ponds are stagnant, full of bacteria, and mostly regarded as undrinkable. But a river is flowing, full of life, vibrant, and has direction. Our money should flow like a river. Coming in and then heading out in the direction that we decide. I was once told that " Money is like little soldiers standing in attention awaiting monetary orders! If none are given, they will eventually wander off or get lost". How many times have you looked back and the end of the month and said "where did all my money go?". Our money must have individual assignments because money without an assignment will always get lost!

A foundational principle in managing our finances is "Paying yourself first". This is something that is always talked about in the financial planning world but for some people seems to be a very difficult discipline. I myself struggled with this for a long time. I had financial goals and things I wanted to save money for and would use what was left in my checking account at the end of the month to go towards those goals. I made little or no progress doing this. This was because I didn't have a budget in place either. Not to get out of focus but I know budgets can be a daunting task. I actually like to call mine a "spending strategy". Budgets seem constraining but a spending strategy feels more like me telling myself where my money is going. Just like the river. But no one wants to check their spending strategy every day hoping that they stay in line and have whats left at the end of the month to fuel theirs dreams and goals. This is why I implemented what I call ESSA ( Eliminate, Standardize, Simplify, Automate). The first thing I did was eliminate all the extraneous expenses I had. There were so many small things I was spending money on without seeing the impact it had such as iTunes, Starbucks, and eating out. Then find ways to standardize how I'd approached each area of my spending strategy. Placing everything into a bucket such as Home, Auto, Utilities, Shopping, Food and Dining, Entertainment, etc. Then I had to simplify how to manage all of this. The best way to simplify your finances is to setup a www.mint.com account or any type of asset management tool. This is the only way to see your finances in one snap shot. You can get a clear picture of where you are, which is always needed before you decide where you want to go. Then you can Automate!

This is how you pay yourself first. Automation! Now that you have a clear picture of your finances you can calculate how much cash flow you have. Say you make $4,000 a month with $2,000 fixed expenses( rent, mortgage, bills, car payment) and $1000 variable expenses (shopping, food, drinks, entertainment). This would give you $1000 a month of cash flow. Looking at your mint portfolio would easily break this down for you. Now what are you going to do with that $1000. You set goals and objectives.

I use www.capitalone360.com as an external high yield savings account that allows you to open multiple accounts. Then I can create auto drafts from my personal checking account. I know I get paid of the 1st and 15th. So I can plan on auto drafting out $500 on the 1st and $500 on the 15th going to my goals that I setup in Capital One 360. You might want to leave yourself a little margin in case you go over your spending strategy. But I think you get the full picture of how this is done. This will bring so much peace about your finances and will help make you feel in control in stead of your finances controlling you. Remember, no one cares about your money more than you. You are your own CEO.

Be courageous and take charge!

- Jonathan