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'Pay yourself first' method can force you to save

By Gary Foreman

The New Frugal You
New Frugal You columnist Gary Foreman
Gary Foreman is a former financial planner who currently edits The Dollar Stretcher website and newsletters. He writes "New Frugal You," a weekly Q&A column about frugal living, for CreditCards.com

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Question for the CreditCards.com expert

Dear New Frugal You
Please help! I struggle to save money and usually fail. I begin the month with good intentions, but by the end of the month after I've paid bills I'm usually broke and haven't saved anything. Is there any hope for me? -- Dalene

Answer for the CreditCards.com expert

Dear Dalene,
Sure, there's hope for you! In fact, you've already taken the first step towards solving the problem. You've recognized that you need to save some money and that you need help to do it.

For some people, saving money is almost a lifestyle. They do it naturally, as if it's part of who they are. It comes easy for them.

For others, such as you, the opposite is true. No matter how hard they try, saving money is always a struggle. It's almost as if they had an anti-savings gene!

That doesn't mean that it's impossible to save. It just means that you need to pick an appropriate strategy.

It's better to know and work with your personality than to try and fight it. If saving isn't easy for you, one of the best tools to change the dynamic is a "pay yourself first" strategy.

The concept is simple. Suppose you want to save $100 each month. You treat your savings as if it's a bill that comes due at the beginning of the month. The first "bill" you pay each month is the $100 for savings.

That guarantees savings. You can't run out of money before you get to it. No question about whether you'll save this month. By putting away savings at the beginning of the month it's a done deal.

The reason that it's so effective is that it works with the nature of spenders. For spenders, expenses have a way of expanding to their income level. For instance, you'd think that it would be easy to save money right after getting a raise. But, almost magically, for spenders, expenses grow by the same amount as the increased income.

Paying yourself first reduces the amount of money that you have to spend. One of two things will happen. For some, your expenses will adjust almost automatically. You have less on your debit card so you'll simply spend less. For others, you'll need to find an expense or two to trim near the end of the month. You might squeeze your grocery bill or do some price shopping on your auto or homeowners insurance. Or you may find you're simply spending too much on a category.

Paying yourself first should also help force you to prioritize your spending. Your monthly bills won't go away. So you'll probably find yourself deciding what expenses to reduce so you can pay your electric bill or make your car payment.

Suppose that you cut all unnecessary expenses and still run out of money at the end of the month. What then? It's time to give your expenses a serious review. Compare your spending to some benchmarks. You may find a category or two you can reduce.

How good are you at saving money each month?

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It is possible that your income is just enough to cover basic necessities and that you don't spend anything on extras. If that's the case, the only way to begin saving is to find a way to increase your income. It's not easy, but at least you understand what it takes to solve your savings problem.

You'll also want to have a plan to handle unexpected expenses. The truth is that they're really not all that unexpected. You know that cars will need repairs and appliances will wear out. Sooner or later, most of us experience an unplanned medical bill. You know that these expenses will happen. You just don't know when they'll occur. That's why you need to plan for the "expected unexpected."

Your savings can be a big help when auch a bill appears. In fact, that might be one of the reasons why you want to save. But, remember that if you're saving for a child's college or your retirement, the balance in savings should increase each year. If you pull too much money out for emergencies, that growth won't happen.

Also, don't let a credit card ruin the strategy. It's easy to run out of money near the end of the month and substitute plastic for cash. Don't do it. You'll defeat your own plan. Not only will you not save money, you'll soon have a credit card balance hanging over your head.

Finally, think about where you'll want to stash your savings. If it will be a temptation to you, you'll want to make it difficult to make a withdrawal. You'll want to be able to access it for those unexpected expenses, but not have it available for every whim.

Dalene, don't give up on your ability to save. Unless you're living on the barest subsistence level, you can save a little each month. It's just a matter of finding a method that works for you and applying it on a consistent basis.

See related: Alternate strategies to saving for emergency funds

For more than 35 years, Gary Foreman has worked to help people get the most for their money. Prior to founding The Dollar Stretcher.com, he was a financial planner and purchasing manager. Gary began The Dollar Stretcher website and newsletters in April 1996. Today the website features more than 6,000 articles on different ways to live better for less. Gary has been interviewed by The Wall Street Journal, The Nightly Business Report, USA Today, Reader's Digest and other newspapers and magazines. Gary answers a question about a budgeting or saving issue from a CreditCards.com reader each week. Send your question to The New Frugal You.

Published: August 30, 2012


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