How do you structure your monthly budget? Most people I speak with view their monthly budget in a spend-first way. They list all of their expenses and divide them into two categories: necessary and discretionary. Necessary expenses might be your mortgage payment, utilities, or grocery money. Discretionary expenses could be your cable bill, dinners out with your spouse, or taking your kids on vacation.
There’s nothing wrong with setting up your budget by thinking about what your expenses are. However, I like to look at it in a slightly different way: give to yourself first.
Many people have some kind of “save first” or “pay yourself” goal when they’re building a budget. I frame it as “giving to yourself” because I think the language matters. You aren’t truly paying yourself by setting up savings or charitable giving goals. Instead, you’re giving yourself the opportunity to be physically, spiritually, and emotionally fulfilled by your financial choices.
What does it mean to give to yourself?
My rule of thumb is that you should give yourself 20% of your monthly income. You split the 20% “gift” two ways: half of it is going toward saving for your future goals, and the other half is being given away.The money that’s going toward your financial future can be put in a savings account earmarked for a specific financial goal, it can be used to fund your retirement account, or you can set it aside as part of your emergency fund. The money that you’re giving away should be donated to charity, taking care of family or friends who need a little help, or given directly to a foundation or organization you support.
Why does giving to yourself first work?
In our world, we’re often taught that budgeting needs to put spending first. We focus on our expenses, and how we can work costs to our advantage. We want to spend on life’s luxuries before we think about giving our money to a future goal, or to others who may need it a little more than we do due to hard times not their fault. Because of this, the “give to yourself first” concept might feel uncomfortable, or even nerve wracking, when you get started.I encourage you to push through these growing pains and stick with it. Giving your money to your future self and to a cause or people who you’re passionate about helping actually helps you in several ways:
- You’re making it possible to ensure a secure financial future for yourselfand your family
- You’re naturally sidestepping debt by reorganizing your spending
- You’re using your funds to benefit others, which leaves you feeling emotionally fulfilled
- You’re preventing rash spending decisions because you’re focusing on your correct financial priorities
- You’re working to build a legacy with your money rather than throwing it away on things or experiences that don’t align with your values. Garages and storage bins are full of stuff that ultimately becomes a nuisance.
How does this look in practice?
Let’s take a look at an example of how giving to yourself first can be incorporated in your life.John takes home $1,000 a month. Before any bills are paid, 20% of John’s monthly income is automatically taken out of his account and set aside. $100 of John’s income is put in a savings account earmarked for giving to others. At the end of the month, John can donate this money to a charity or organization that he’s passionate about. Alternatively, John might choose to wait several months and donate a lump-sum then, or use the money to do something good for a loved one who needs it.
The other $100 that John took out of his income is set aside in a savings account that’s been earmarked for giving to himself. This money can be set aside as emergency savings, put into his retirement account, or put toward a big-picture savings goal, like purchasing a home.The rest of John’s money is left for bills and discretionary spending. If, for some reason, John’s bills go over $800 that month, he’s going to need to figure out where to cut back. Or he may need to call his debtors and explain that he’ll make a plan to pay them next month when there’s more room in his budget. The money that went toward the two earmarked savings accounts isn’t ever touched for bill-pay purposes.
One thing that giving to yourself first does is give you perspective. It forces you to make hard choices. As Ayn Rand once said, you can avoid reality but you cannot the consequences of avoiding reality. By prioritizing your spending, you’re aligning your money with your values and setting the stage for less worry and stress. You’re showing yourself, and the world, that you value your financial future, and that you value giving back to others. By making these decisions with your money before you pay any bills, you’re setting the tone for the rest of your budget - and with your long-term financial goals.