Jillian is trying a new savings strategy that many people use to force themselves to save money. Instead of saving whatever is left at the end of the month, they ‘pay themselves first’ at the beginning of the month, or whenever they are paid. And, surprisingly, there are a lot of people that swear by this method. But it’s not working for Jillian. There never seems to be enough left at the end of the month to pay her necessary bills. We are going to look a little deeper into Jillian’s situation, see where she might be stumbling, and learn from her mistakes. Why does Pay Yourself First work? It seems that in nature certain events will continue until they run out of fuel. Wild fires are an example. They will continue burning until there’s nothing left to consume. Your expenses can work the same way. Many people will continue spending until all the money is gone. No matter how much money comes in some bill or new purchase will take it. Paying yourself first turns this problem into an advantage. Treat yourself like any other vendor, utility, credit card company. And pay yourself first. If you take 10% of your income and put it in a savings account at the beginning of the month – or every time you are paid – the amount of money available for spending is less. At the end of the month you might still wonder where all the money disappeared. Only this time you’ll know at least 10% of it is sitting in a savings account earning interest. If you make $3,000 a month, could you save $10 a day? That adds up to $300 a month, or a “paycheck” of 10%! For some people this plan works wonderfully. Their spending seems to automatically adjust without any real effort. They have a little less in their pockets and so they spend a little less. One less Starbuck’s coffee or impulse buy. Gradually they begin to accumulate savings. Unfortunately, Jillian doesn’t appear to be one of those people. Remember, the idea of ‘paying yourself first’ doesn’t create any magic. You’ll still get a bill from the electric company each month. And they’ll expect you to pay it. Jillian’s plan might not be working for several of reasons . Perhaps she’s getting to the end of the month and has no money because she hasn’t cut back on unnecessary expenses. A certain amount of self-disciple is required. You need to resist that daily Starbuck’s coffee or new shoes. Before you buy anything, ask yourself: Is this absolutely necessary for me to live? Empty pockets are an acceptable part of the deal and an incentive to stop spending. Another possibility is that Jillian has tried to save too much. It could be that she hasn’t left enough money to pay for the basic monthly expenses. In that case, she’ll either need to make some adjustments to her basic expenses (like cutting back on cable channels or finding a cheaper phone plan) or adjust the amount she pays herself each month. Unexpected repairs and expenses could also be sinking Jillian’s plan. The ones that we all know will happen. We just don’t know when or how much they’ll cost. Home and auto repairs are often the culprit. For these unexpected expenses, you need an Emergency Fund. Your budget plan needs to cover this type of expense. Put some money away each month for these ‘big hit’ expenses. Does it make sense to put money in a savings-type account earning 1% when you’ll be paying 25% in interest on your credit card balance? No, it does not. However, reducing your debt is actually a way of saving money. For every dollar that you repay this month, you’ll reduce next month’s interest charge. So you’ve really saved money by paying part of your credit card balance. You’ll also be working towards being debt-free. Sure, the next time your car breaks down, if you don’t have enough saved up in your Emergency Fund you might need to pull out the plastic to pay for the repair. But, if you’ve developed the habit of using credit cards for emergencies only, and reducing that balance each month, you’ll get right back on track. One final thought: Starting a ‘Pay Yourself First’ program is always easiest when you save as you go. Collect a $300 fee? Put $30 away until you can get it to the bank. Got a big tax refund coming? Take a little to treat yourself, and put the rest in savings. Any sort of financial “windfall” should be treated as a way to supercharge your savings plan. Can Jillian get her ‘Pay Yourself First’ savings program back on track? That depends on what she hopes to accomplish with it, how she tailors the plan to her particular finances, and how disciplined she is. But if she sticks with it, and sees her savings grow, it will give her a little extra incentive to keep reducing those unnecessary expenses and putting money away for the future.