we’ve made no secret that we aren’t of the budgeting persuasion. we’ve tried budgets, and they don’t work for us, or maybe we’re just bad at following all those line items. but that doesn’t mean that we suck at finances, and if you’re like us, there’s still hope! despite not following a budget, we have still learned how to save a ton and stay on track with our ambitious financial goals without much struggle, and today we’re sharing how we do that.
our strategy: paying ourselves first.
paying yourself first is a much written-about topic, though we didn’t arrive at this strategy by reading books on wealth-building. in fact, we didn’t even know that what we were doing was called paying ourselves first until a few months ago, well after we started this blog, when a helpful commenter pointed it out. to us, our strategy is truly about hiding money from ourselves, so that we don’t spend it, which began as a survival strategy back when we earned a lot less than we do now, in order to keep us from going off a financial cliff. it’s our life hack to succeed financially despite some stunted growth.
since we’re not naturally frugal, we also weren’t born great savers, and back when we were young cubs in our careers, earning barely enough to scrape by, we were terrible at saving even a few pennies. we figured out, though, that there were things we could do to hide money from ourselves, to make it harder or impossible to spend, and that’s truly how we began saving in the first place, which was what helped us reform our ways and get on track for early retirement. as we began earning more, our cash hiding/paying ourselves first strategy only grew stronger, helping us avoid lifestyle inflation, and raising our savings rate to the high rate where it is today.
the idea with pay yourself first is that you hide a bunch of your money, and then you live off what’s remaining. even though we’re bad at following line item budgets, we’re good at living within a certain amount of money. think of it as backdoor budgeting. you’re basically accounting for all of your financial goals up-front, and then forcing the rest of your spending to fit into the remainder. pay yourself first is the perfect strategy for people like us who — left to our own devices — would spend our money before we’d save it, despite our best intentions.
here’s what our pay ourselves first approach looks like:
paycheck splitting. this was the very first strategy we employed, to build up our very first emergency fund. most hr departments give you the option of having your paycheck deposited in more than one account. rather than getting the whole paycheck in our checking account, we have part of it deposited into a savings account. this way, we never “see” the money in our spendable accounts, never miss it, and don’t have to have the discipline to move it over to savings. as our income has gone up, we’ve increased the amount that gets put into savings, so that our realized paycheck — the amount that shows up in checking — hasn’t seemed to grow much over time. that’s helped us avoid lifestyle inflation, while upping our savings rate. if you’re in a two-income household, another way of doing this would be to have one entire paycheck deposited into savings, and then live off the other. back when we still had our side hustle, we had that entire paycheck deposited into savings.
401(k)/retirement account allocations. this is a well-known pay yourself first strategy, a good way to cut your tax rate, and a no-brainer if you’re getting any sort of employer match (free money!). money comes out of your paycheck and goes into your retirement account automatically, pretax, so that over time you save a bunch for retirement without ever having to say goodbye to the money you’re saving. most fund managers offer a laddering option, where you can start with XX% of your paycheck the first year, and increase your contribution rate gradually over time. we did this, and worked up to fully maxing out at a pretty early age, which is why we’re now in the fortunate position of considering a two-tiered retirement strategy of dirtbag living til we’re 59 1/2, and then living larger once we can tap our 401(k)s.
automatic investing. since our 401(k)s are in great shape, we’re super focused for the next two and a half years until our retirement on building up our taxable investments, which will support us until we can withdraw from our 401(k)s without penalty. we’re heavy users of automatic investing, which can often be done for as little as $50 a month on a recurring date you choose. these days, our automatic investments are a whole lot higher than $50 a month, but that’s because we worked our way up to that. as our income grew, we increased our 401(k) contributions, we upped our paycheck splitting, and we increased our automatic investments. though automatic investments don’t “hide” the money from us like the other methods do, we can schedule the date when the money will go out to make it feel inevitable. since our house and rental home mortgages both come out of our account on the first of the month, we have our automatic investments go out on the 15th, when we get our other paychecks. at most, we have that money for a day or two, so we never really miss it, and we also plan for that money to go away every month. we now have as much go out in our auto investment withdrawal on the 15th as we pay for our two mortgages on the 1st, which has made our invested total grow quickly.
not budgeting for bonuses. we both work in jobs that pay out sizeable year-end bonuses. (we won’t lie — it’s pretty awesome, and has helped us meet our savings goals over the years.) the problem with bonuses is that it’s easy to plan on them, or worse, to spend them before they even come in. instead, though we know they’re coming each year, we never plan to spend them, and put nearly every dollar toward one of two goals, either paying off the house by our retirement date, or increasing our taxable investments. back when we earned less, it wasn’t possible to allocate every dollar to our long-term goals, but again, as our income has increased, we’ve increased the amount we save from our year-end bonuses, now up to the 95+ percent level. the key to this one is telling yourself that you aren’t going to spend whatever extra you get. this one takes more discipline than the other pay yourself first strategies, but it becomes second nature with practice.
month-end capturing. this is a term that we made up, meaning that whatever’s left when we get our next paychecks on the first of the month, we take out of our checking account and put toward our goals. most often, this money gets put toward our home mortgage balance. because we’ve gotten used to living on what we earn each month, minus all the money we “hide” from ourselves (which is most of our post-tax income!) and all the money due for our mortgages and bills, we know that we don’t need to carry any money over from one month to the next in order to get by. so any remainder gets invested or goes against the mortgage. because we already invest so much, there’s not always money left, but when there is, we put it to good use.
taking only 15-year mortgages. this one doesn’t totally fit the pay yourself first model, but we’re including it here because people like to call buying a home “paying yourself instead of paying a landlord.” the problem with that thinking is, with most 30-year mortgage amortization schedules, you’re actually paying the bank, not yourself. for a loooooong time. you can crunch your own particulars here, but it often takes a much as 10 years into a 30-year mortgage before you build any real equity month to month. 10 years is longer than most people stay in a home. however, with a 15-year mortgage, you begin accruing significant equity and lowering your loan balance almost immediately. of course, you may still gain theoretical equity in the form of market increases, but we all learned the hard way in 2008 that we can’t count on that. both because we want to pay our house off stat, and because we don’t want to pay a dollar more in interest than we have to, we have a 15-year mortgage on both our home and on our rental property. (professional landlords would tell us this is dumb for the rental, but we just weight certain things more highly.) when those mortgage payments go in each month, we know that our net worth is actually going up, and we’re not merely accruing a tax write-off worth only about a third of the value of the interest we’re shelling out. bonus: 15-year mortgages come with lower interest rates.
bottom line: for people like us who aren’t naturally great savers or budgeters, paying yourself first can be a great tool to build wealth and reach your goals, in a fairly automated fashion. it also sets you up for future early retirement success by avoiding the insidious trap of lifestyle inflation, and keeps you used to living on a minimal amount of money.
what tricks do you use to hide money from yourself? any methods of paying yourself first that we missed? or are all the rest of you super good at budgeting, and you don’t need to resort to tricks? ;-)
Categories: we've learned