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? ;-)
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Categories: we've learned
Agreed ONL. I’m glad you guys found a route that works for you. I tried this approach, but unfortunately my wife doesn’t look at our checking balance before deciding what she wants to buy :o( The good news is that giving her cash works pretty well, except at the grocery store.
It’s all about finding what works. The end results, provided you are miserable along the way, are what really matters. Keep up the great work!
-Bryan
Thanks, Bryan! Couldn’t agree with you more — we each have to find what works best for us! We feel lucky that we’ve found our “secret sauce.” :-)
Also an anti-budgeter! I used to be really involved with all the money transfers when I had debt. I wanted to make all the payments. Now that its nearly all to savings, I’ve shifted to many of these strategies. Split check, auto transfers, auto investing/ 401k. I haven’t had a bonus since my loans got wiped, but hopefully I can stay diligent! I want to spend it all on a house fund increase! ;)
That’s awesome. You’re making such great progress! Automating it all will make things easy over the long-term, too, in case you ever find yourself less motivated than you are now. We’ve definitely had some lapses, but having the automation baked in ensures that we’ve never gone off the rails.
We’ve done everything about exactly the same as you describe except we were late to the party in figuring out the benefits of tax advantaged investing so we’re heavy on taxable funds and light in 401(k)/IRA and so focusing on those first in the home stretch. This is great advice that absolutely works!
The one thing I would emphasize that goes against almost everything that you read in early retirement books and blogs is that I would recommend not looking at you balances regularly, maybe once a year at most. Some people find it motivational to update more regularly. We have found the opposite to be true since monitoring monthly for our blog. When watching your investments regularly, it is easy to get frustrated seeing how slow progress is on a month to month basis, especially when the markets dip. Just follow the advice in the post and trust your processes and the results will come. Out of site, out of mind and you’ll be less likely to get in your own way.
If only those tax-advantaged funds weren’t so restricted, you could catch up faster, and we could do more (we’d love to be able to do Roths and IRAs, for example). But then no one would be funding government services. ;-)
As for tracking, you are clearly more disciplined than we are — we check all the time, not that that’s always good. We look at all the metrics, though, not just the net worth total — progress against the mortgage, savings rate, etc. That helps put things in context, and show progress even when the market is down.
We do all of these suggestions and they really do payoff! I wish more people understood that anything longer than a 15 year mortgage is a joke. People don’t realize how much money they throw down the drain in interest. Great post!
Oh, so true! We even tried to get 10-year mortgages, and our banker acted like we were crazy. :-) In the end, there was no interest rate difference, so we just went with the 15 and are paying it off much faster. But 30 is nuts — sooooo much interest.
I wouldn’t say I follow a budget line by line (I routinely go under or over) but I do like the reassurance behind it. Once I tap out a category, usually restaurants/entertainment, I almost completely eliminate anything having to do with those categories until the next month. I don’t find it particularly difficult and I never get the “spending craving” even though I already reached the limit.
Paycheck splitting is something we also employ, half the check goes to bills and half goes to saving/vacation/emergency/investing. Haven’t mixed finances yet (not married) but will likely try to do as you guys do – 1 income to live, 1 income to save (aka play).
-Rich
Glad you found what works for you! We just tend to be a little too go-with-the-flow in spending — if some friends are going to grab a drink, we want to join them, even if we’ve used our whole dining budget that month. But, we make up for it with reduced spending elsewhere. So instead of the budget, we just work with a set total for the month, and that works for us.
You already know this, I’m sure, but there’s no one right way to combine finances. It’s worth talking a lot about, and perhaps even trying a few things. We did a full combine when we got married, but also set up individual accounts and gave ourselves an equal allowance, so that we could spend some without scrutiny. Over time, we realized we didn’t need that, and stopped the allowances. If we’d felt like “well, that’s what we decided, so we’re sticking with it,” it would have slowed down our overall savings!
Thanks, I feel there will definitely be an adjustment period and I’m sure you we’ll probably change as you guys did to whatever works for us.
Cheers!
Being a minimalist, I’m also an anti-budgeter. I don’t ‘shop’ and want much stuff, so that helps! One trick I have found helpful, and that I suggest to young couples, is to live off of one partner’s paycheck and put the other in the bank to be used for savings, investments or large one-time purchases. The key is that is that if you live off of only one paycheck for the monthly necessities, then if one person loses a job or wants to take time off work, it won’t hurt so much. Plus, it can be the easiest way to build up a large savings account for investing.
As far as the mortgage, as a real estate investor myself, I have a different take. I look at mortgages as leverage and they are a pain in the butt to get these days, so I get 30-year mortgages and don’t pay them early. I let the tenant pay them down. Also, if there is a lull in vacancy, or the tenant doesn’t pay, then it is much lower with a 30-year than a 15-year. Also, putting my money into a mortgage means I can’t access it unless I sell. I would rather save a large sum up and then refinance for a smaller monthly loan amount, pay it off or just buy another investment. But, putting my money in there for the same monthly payment doesn’t resonate well with me. Although, I know my approach is purely from an RE investor standpoint and this is the minority opinion from a perspective of most of the PF/FIRE blogs.
By the way…. LOVE the term “dirtbag living”!
We know RE investors would disagree with our approach, and we totally get why. But we want to get to as low a budget as possible in ER, and paying a mortgage would mean having to sell more shares, paying more capital gains, and — most importantly — potentially going off the obamacare subsidy cliff. Not a risk we’re okay with! 😊
I’m not sure I’m aware of what you mean with the Obamacare subsidy cliff. Can you give me more details? If you don’t want to disclose in this comment section, then please email me. It sounds like I might be missing out on an opportunity to save more! simpleisthenewgreen @ gmail . com
Thanks!
Happy to share! Check out Root of Good’s post about it: http://rootofgood.com/affordable-care-act-subsidy/. Basically, if you can keep your MAGI under 250% FPL (federal poverty level) for your household size, you can get a sizable ACA subsidy. For two people like us, that’s a smidge under $40K. (We’d get a bigger subsidy if we lived on half that, but that’s farther than we’re willing to go!) ;-)
That sounds rerally familiar (I have a an article planned in 10 don
😉
That sounds really familiar. (I have post lined up in 10 days on automated saving)
We follow a budget, not so strict per category, but more an overall view.
We also belief strongly in pay-yourself-first. It really helps if all the saving and investing happens without any effort.
The best thing I belief for us is the personal fun budget. This is for fun stuff we want to do, and the left over can roll to the following month.
Makes sense for the fun money to roll over. Not rolling over doesn’t make sense for everyone, and it won’t be our approach once we quit our jobs. Then we’ll be working with one pot of money for the year, so there will be tons of rolling over! Look forward to your post on automation.
One pot for the whole year?
What if you break it up in smaller pots? Like a pot for food per month, travel per year, fun per quarter? Would this not be more easy to manage?
That sounds a lot like a budget. 😉 In truth our approach will likely evolve over time!
I am a recovering budgeter. I like numbers (math degree) so playing with numbers in the form of a budget was always fun for me. Eventually though, I realized creating budgets is a time suck and I basically spend the same in each category every month anyways. Once you get your spending under control and stabilized, budgets are essentially useless.
Love the point on the mortgage. Would never take out a 30 year, will probably pick a 10 year or a 15 year with no early payoff penalty. I have heard some interesting theories though on why taking out a 30 year could be advantageous, essentially just that your $$ will earn more in investments (and compound interest over 30 yrs) than you are losing on your rate. With mortgage rates around 4% here, I can sort of see that, but seems like a big gamble in the market to me. I just want to get it over quick and easy, then no more dealing with the banks.
There is lots of valid and conflicting advice on mortgages. To us, even if you have a chance of getting a better return in the market, that’s still a gamble. Paying off your mortgage early is a guaranteed return of whatever your interest rate is. Plus, like you, we just want to get it over with!
I’m pretty similar. I don’t budget per say. But my HSA and 401k contributions are automatic. Then once I pay my bills at the end of the month, everything that’s left over goes into after-tax brokerage account or IRA. I know what I’d like that amount to be every month, but my expenses are lumpy so I don’t like the automated investing approach. One month it could be nothing (rarely), and maybe in a bonus or extra paycheck month it will be a lot more. I have some high expense months in the summer (weddings and travel) but then it should come back to reality in September. That’s also raise and bonus month :)
Sounds like that approach is working for you, which is awesome! Just keep going!
We used to drive ourselves crazy trying to follow a strict budget. Then one day we said the heck with it and basically began doing the same thing you are doing. We save a huge percentage of our income right off the top and then spend what is left. We are saving more and it is way less stressful!
Terrific! Glad you guys found what works for you, like we did!
Hey, any system that achieves the goal–the sort of retirement you want when you want it–is a good system, I think. I’m wondering how you handle a couple of challenges: 1) how do you know you’re saving enough to achieve your long-term goals? and 2) if someone following your system were to find they kept running out of spending money each month, how would they know where they’re overspending (spending more than they realized and more than the really want to). Thanks!
Good questions. Giving the big caveat that we are not financial planners and this is just our system, figured out from trial and error over the years…
Bottom line is: We know what we tend to spend. We aren’t wasteful spenders, but we also prefer not to give ourselves temptation. So we know roughly what we need to live on in early retirement, with some assumptions we’re making, and have some numerical targets to make it so we will have that amount to spend each year after we reach early retirement. So 1) We know we’re reaching our long-term goals by tracking progress toward those goals each year, in three categories: 1. paying off the house, 2. taxable investments and savings, 3. tax-deferred savings, to fund our “old” retirement. and 2) This one is super individual. For us, we’ve been at this a long time, and live as though our income is about 1/3 of what it is, but we’ve arrived at this system through slow increases. If a friend wanted to try this, we’d recommend starting small — maybe an extra $100 going to savings each month — and then gradually ratchet it up to the point when they’re ending up even at the end of the month. The biggest opportunity is when raises come — we recommend banking 100% of any raise, unless you’re still tackling debt (but then debt should get 100% of that raise!).
I used to be a avid budgeter… but it is time consuming and since I do participate in quite a bit of financial hacking to save money I have hundreds of transactions that occur each month and I don’t want to go thru them… Mint and the like always get confused on what many of the transactions are…
I am with you in paying myself up front… Maxing out all retirement account options available and went with a 15 year mortgage… I have 2 brokerage accounts that I continue to add money and invest with in addition… Whatever I have left over after all my bills are paid I figure it fair game… But there usually isn’t much of anything left over…
We’re in a similar boat, since we have a ton of work travel expenses that confuse the heck out of sites like Mint, and are hard to exclude. Your approach sounds like it’s working for you, which is perfect!
I consider myself more of a passive budgeter. I do not stick to a strict line by line budget but instead set average spending amounts in Mint and track our spending month by month in a spreadsheet to see trends. It does help, though, that my wife and I are naturally not big spenders. I do agree though that automatically paying yourself first is one of the best ways to save out there. We have had great luck with it!
Not being big spenders by nature is HUGE! You guys have a big leg up on natural spenders like us. :-) But great to know that automating your savings works even for more disciplined folks like yourselves.
I’m a pretty rigorous budgeter, but we “pay ourselves last” too. When we set out to spend some money, but then we don’t do it, we don’t carry over the cash. We invest it along with our next month’s investment. That we never have the proverbial cash burning a hole in our pocket.
A different twist on the idea that sounds perfect for your situation. If we did “pay ourselves last” we wouldn’t have gotten where we are today — we need the enforced automation of saving first — but it sounds like a good system for disciplined budgeters like you!
I would say that we don’t budget per se, but rather track our spending and when we see something trending upward we say, “Whoa, whoa, what’s going on here?!” and then try to get it back to where it usually trends.
We do almost all of those other tips though and they work well, especially with the bonuses. We also can get nice bonuses, of which 90% goes to investments/savings. We “give” ourselves ~10% of them added to our individual fun funds (which roll over month to month). I’m shocked every year by people who have them written into their budgets and depend on them to make ends meet. I just don’t get it.
LOL — Love the idea of the “Whoa, whoa!” alarm. :-) Our de facto system is similar — if we *don’t* have enough money to get to the end of the month and end up having to pull from our savings slush fund, then we pull out the magnifying glass and figure out where we went wrong that month.
Good job on saving most of your bonuses. As for those who budget for the bonuses, we for sure counted on bonuses before we got our financial act together. We never spent the whole thing before it came, but we would plan to pay for Christmas gifts out of it, for example. Now we don’t budget for any part of the bonuses, but that’s thanks in part to our incomes going up over time, and in part to us getting more disciplined.
Backdoor budgeting, and paying yourself first…I love this! I have a “budget,” but in reality it’s more of just rough guidelines that I know will not be necessarily met every month (because expenses/life can vary so much). I am an avid fan of automation and paying yourself first! Automatic deposits for investing, automatic dedications from my paycheck to my 401(k), automatic bill pay….it’s made life much less complicated. It’s so great that you brought up increasing your savings & goals with raises and bonuses, that’s exactly how I treat them. I’m so comfortable living below what I make, that when that additional income comes forward it makes it incredibly easy to invest & save without even counting on it! Thanks for sharing your tips too on your 15yr mortgage, those will come in handy for the future. :)
If you’re already comfortable living on way less than you earn, then you’ll be golden in the future when your income goes up. Just make sure you don’t give into the temptation to buy more house than you need, when it’s time for that, and you guys will be set for life. :-)
“our strategy is truly about hiding money from ourselves”
When I started up a Roth with automatic contributions for my partner, he said he didn’t notice that his paycheck was any smaller than before. And yet the small difference in size meant a lot for the size of his Roth 6 months down the line.
We don’t have a hard, line-by-line budget. Automatic deposits take care of most our savings and investment accounts. We usually stick to the same range in dollars for groceries/week (~100-120). Same for gas. We live fairly predictable lives, maybe even boring at times. :)
Not noticing is the key! And if you don’t notice what’s currently going into savings each month through your automatic deposits, perhaps you could increase them another $50 or $100 a month? Anything you can do to up your savings will pay big future dividends.
I love this outline. We utilize this, but I also keep a really geeked-out spreadsheet of our budget, because I love to see all the numbers. But automatic “pay yourself first” tactics are the best way to go! :)
Haha — We for sure keep some geeked-out spreadsheets too! That’s definitely the hallmark of a PF blogger. :-)
Ahah! My comments may *finally* be going through :) So — I’m a huge fan of paying yourself first. I only started doing it about 18 months ago and it’s been basically a revolution in my financial life. Go you!
Yes, it went through! And so glad that paying yourself first is working for you. Wohoo!
I’ve actually realized that I am more likely to spend money when my savings is all automatic. I need to “actively” save the money. I am a somewhat reasonable budgeter though so it all works out okay. My strategy at the moment is to:
1) put my entire paycheck towards my pre-tax 401(k), then my after-tax 401(k), while still maxing out the ESPP (this takes the first six months of the year)
2) have a “next month fund” savings account that gets all of my paychecks (I get paid twice a month) throughout the month and if that isn’t enough for the next month, I’ll borrow from my savings account, and then at the beginning of the next month, I transfer what I need to my checking account
3) when the ESPP period is up, I sell immediately and then transfer to the first goal on the list: a) next month fund, b) savings account, c) mortgage, d) taxable investments. same with any extra money in the “next month fund”
I’ve tried paycheck splitting in the past and it unfortunately just doesn’t work for me! Automating bills and credit card payments has though!
My main goal of my “budget” is to smooth out the lumpy expenses. My expenses can vary a lot from month to month, anywhere from $2,000 to $6,000 and usually it averages out to a bit over $3,000/month. So by budgeting, I can plan on the big lumpy expenses like insurance, property taxes, and travel AND keep my savings rate more similar month-to-month.
Love that you’ve found a system that works well for you. It’s different from ours, but so what? ;-) This is a great example of why we never say “here’s what you should do to retire early or build wealth or reach whatever other goal” — because everyone’s different and something different will work for each of us. The important part is taking the time to find your own way, and road test enough strategies until you find your magic formula. Thanks for sharing your approach!
Lifestyle inflation is so huge.. I was reading a PF blog the other day that essentially said that there are people making 50k a year worth more than doctors making well into the 6 figures.. I was lucky to be promoted quickly and started spending more just as fast. Its an easy trap to fall into but once you start saving it is more fun to watch your balance grow as you ‘pay yourself first’ than to spend it just because you have it. For me that is when I really started to realize exactly how much I was making and what all I could do with it
It’s great you had the realization early on! A lot of people don’t realize it until they’re “golden handcuffed” and stuck paying fora high rent lifestyle. We agree, though — so much more fun watching the numbers grow, especially since they represent FREEDOM!
We’re a mix of both- like you we had grown into our salaries but I’m a naturally frugal person so I felt the stress and after checking a year of spending confirmed we were a bit spendy. I was able to use that info to forecast probable FIRE dates (once I realized that was even a thing) and I think that was the info that clicked with my wife, seeing an actual achievable end date was like a light switch and we really haven’t had an issue meeting our savings goals since then. We use Personal Capital to track and though I have a “budget” it’s really just a planning tool. We don’t actually change our spending based on it except possibly with the travel budget – left to our own vices and with generous vacation days (we both have 21 days + buy 5 every year) we could probably spend a fortune on travel, so it helps keep that in check.
That’s so awesome! I love hearing when folks are so motivated by their “why” to completely change their ways!
We are new to this FI/RE idea, but are very excited to find blogs like this that can give us a clue to how to get there. We are not natural budgeters either, but we are natural savers. It helps that we’re excited to see our investments grow. I totally understand Scrooge McDuck. I doubt I could fill a silo with gold coins, but if I could, I would visit (er swim in) it often. Thanks for the tips! Most of these are not new to us, but reading through them is motivating, even if it feels like our goal is so very far away.