Wednesday, May 22, 2013

Paying Yourself

Honestly, I’m a terrible saver. If there is money in my pocket, it is absolutely flammable. Knowing this about myself, I set up a safeguard to stop me from being able to spend too much by using automatic savings. I bet many people use this easy “pay yourself first” plan, but I recommend going a step further and using an automatic savings account for both saving and bills.

It is great advice to figure out your savings percentage from your annual income, but if you have a very heavy monthly bill for something, it’s not always realistic.

New Yorker cartoon by Jason Patterson
Considering the difficult to nail down, but clearly high, number of unemployed and underemployed graduates, many, many people are struggling with a crushing student loan bill each month. With or without insurance, medical bills can be overwhelming. In a city like New York, rent or a mortgage along with maintenance fees (maintenance fees can easily run as high as many people’s NYC rent, and I’ve seen a bed in a hallway listed for $500 a month here, to give an idea of how high that can be), can be enough of a burden for some people to be unable to figure out savings first. For me, it was more realistic to start from my bills.

I started by adding up those monthly bills. The remainder should be how much I can spend frivolously, but in reality, some of that needs to go towards savings. I decided on the percentage of my non-bills monthly income I wanted to save, and added that to the amount that goes to bills. Then I divided my new total by the number of paychecks I get in a month (for me this was two at first, and later four at a different company), and this final number is what gets pulled out of my bank account each time I get a paycheck. I overestimate a little so that when I pay my bills, there is a small amount left over as a cushion.

The reasons I calculated from a monthly view instead of an annual view are because 1) bills tend to be monthly, so it feels simplified to me, and 2) there will be extra paychecks over the course of the year, and that undesignated money can be used to pay down bills, or be added to a savings account, or put aside for unexpected sudden bills. The extra paychecks come from the number of weeks varying for each month. If one is paid weekly, then there will be four additional paychecks, and if one is paid biweekly, there will be two checks left over. Trent Hamm of The Simple Dollar explains this well:

A person who is paid biweekly receives 26 checks per year, whereas a person who is just budgeting using two of those checks every month only accounts for 24 checks. That leaves two left over. Similarly, a person who is paid weekly receives 52 checks per year, whereas a person who is budgeting using four checks per month is only accounting for 48 checks, leaving four left over.

Since the money designated for bills and savings is set aside immediately, there is no chance that I will spend too much and be left scrambling to pay my bills. Unless, of course, I overspend on a credit card, but that’s what the Moleskine money is designed to prevent.

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