Rob Carrick asked this question as a subtitle to an interview with Kerry Taylor about budgeting. The question is whether a viable alternative to budgeting is to take a percentage off the top of your income for savings and just spend all the rest. The unsatisfying short answer is “it depends”.
I have no doubt that Carrick can make this approach work for him; he has proven many times over that he’s very financially savvy. Less sophisticated people can easily get themselves into trouble. These people might misunderstand “pay yourself first and blow the rest” to mean that as long as they set aside 10% of their pay cheques for long-term savings they can do whatever else they want.
Building savings won’t help much if you build up lines of credit, car loans, and credit-card debt even faster. When the various debts grow large enough that your finances reach a breaking point, you’ll be forced to pay off the debts with the supposed long-term savings.
So, paying yourself first and blowing the rest can work with the caveat that you can’t build up debt at the same time. However, this can be tricky to measure. If you get a car loan, you’ve actually spent much more than a single pay cheque (at least for most of us). Does this break the rule about how you’re allowed to “blow the rest” or is it okay as long as you pay off the car loan over a reasonable period of time without building up other debts? In real life it can be difficult to decide if you’re really living within your means or you’re spending your future. This is easy to figure out for extreme cases but borderline cases are more difficult.
I’m a believer in paying yourself first, and realistically, few people will consistently follow a budget. But when you’re blowing the rest of your pay cheque, make sure you’re not consistently spending more than what is left after taking savings off the top.