Tuesday, December 14, 2010

Does Paying Yourself First and Blowing the Rest Work?

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.


  1. I think the Wealthy Barber talked about this as well. What do you do after you've paid yourself first and have your financial house in order? Whatever you want, I guess...since Chilton didn't believe in budgeting either.

    I'm with you though, you can't just set aside 10% and then frivilously spend on everything else. People still need to live within their means, and I'm a believer in setting up a budget and forecast of income and expenses to keep on track.

  2. @Echo: It's interesting that you mention forecasting, because that's essentially what I do. Rather than create a budget to try to control my spending, I occasionally look at my income and typical expenses and project what my assets will look like at some future date.

  3. While I agree with this..I think the biggest problem is that "within your means" is a big caveat. People can convince themselves in many ways that they NEED a new car, or NEED new things. It seems that many of the problems we have is because people thought they were within their "means" and bought a home they couldn't afford. More people need to read this and set budgets, goals and save.

  4. I'm also a fan of "pay yourself first".

    I took it as a given that one shall not have credit debt. But one still has to be aware of irregular expenses like car repairs, and vacation.

    So I have several "pay yourself first" accounts:

    - 25% retirement savings
    - 30% house down payment savings
    - 10% medium term fun (vacation, toys, etc)
    - 4% car repairs

    After paying bills, then it's anything goes (not much left unfortunately)

  5. @Michael James
    Yes, that's how I essentially "budget" as well...it really is more of a forecast to help me reach my goals.

  6. Well, personally I think it's time for the adults among us to grow the hell up and budget their money. The only ones who can afford not to do this are those who earn enough that they can be comfortable despite wasting some unknown quantity of their money.

    It's not that hard. Like I've said before, everyone has a budget; it's just that many people don't know what theirs is.

    Budget yourself enough petty cash that you don't feel overly deprived and you should be just fine. It's just basic addition and subtraction. It shouldn't be beyond anyone with a 2nd-grade education.

  7. @CD Rates Guy: It's true that people often have a hard time distinguishing wants from needs.

    @P2Sam: It looks like you have a system that works for you.

    @Patrick: I agree that budgeting isn't all that hard, but I've never seen the need because I've always naturally spent far less than my income (even from summer jobs while going through university). I examine my expenses to make projections, but I've never needed to budget for the purpose of controlling spending.

  8. I think the key point is to recognize that "spend the rest" doesn't mean spend more than the rest!

    From time to time I end up buying things that I neither "need nor truly want". So sometimes when I'm out and about and see an item that I feel I need and want and can afford, I step back and promise myself that if I really need or want the item that I'll come back in 3 days to buy it.

    I've come to the conclusion that I really cannot afford to buy something that I neither need nor truly want even if I have the financial resources to do so at the time.

    So many times I've never returned to buy the item. In fact, I hadn't given it another thought

  9. @Solo Sailor: I've used the "sleep on it" strategy myself many times. It's definitely a smart thing to do with big purchases.

  10. I've come to the realization that if something I want to buy seems like it's too much money, it probably is. I rarely buy anything I can't pay off in cash within a month. Needs and wants are two different things. I'd argue most folks in severe debt don't know (or care to know) the difference.

    We always pay ourselves first, Chilton just happened to reinforce this for me years ago.

    Budgeting can be done, but it's not realistic to think you can be always on top of it. I like what you and others said about forecasting, certainly more feasible.

  11. @Michael: Ah, perhaps we're talking two different meanings of "budget". A budget is like a diet: everyone has one, but most people don't track it very carefully, and the ones that try to use one to adjust their habits face an uphill battle.