Back to Basics: Pay Yourself First

Back to Basics: Pay Yourself First

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Do you get a lot of e-mail messages every day? I do.

On an average day, I receive between 100-150 e-mail messages in my inbox at work.

In order to keep my sanity, I had to develop an approach to maintain my inbox at a manageable size.

I had to figure out a way to prioritize my time, which is the most important currency in my work day and is also finite.

Managing your money comes with the same limitations as time. Like time, money is finite.

And like time, if you don’t purposely manage it and set the right priorities, it will slip away.

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There is so much income you have every month and you have to decide where it goes each month.

You must learn to pay yourself first. This means that your money should address the most important items for your household first.

In order to pay yourself first, you need to protect the four walls, plan ahead, and have some fun.

1. Protect the Four Walls

These are the most important areas of your monthly spending plan. These areas cover the basic necessities of your family.

The four walls are:

  • Food: Make sure you have taken care of providing what’s required to feed your family and yourself.
  • Shelter: Keep your rent or mortgage payments up to date. You need to have a roof over your head. Also, under this category come your utilities (electricity, water, gas, basic phone service). Don’t let the lights get cut off!
  • Transportation: You need to have a way to get to and from work and other places you and your family need to go. This includes car payments (if you have them), putting gas in the car, and basic maintenance like regular oil changes.
  • Clothing: Ensuring basic clothing for you and your family is covered in your monthly budget.

Think about this:

  • if you have a roof over your head and,
  • if everyone is fed and,
  • if no one is going to cut off the electricity or water and,
  • if you can get to and from work, and you have basic clothing,

You can live to fight another day.

When the home front is protected, you can then focus on addressing the other elements of your financial plan like paying off debt or investing for the future.

2. Plan Ahead

Besides providing for basic needs, when you pay yourself first, you make savings a priority.

If you still have consumer debt (credit cards, car loans, student loans, medical bills, etc.), you need to make sure you build a beginner’s emergency fund of at least $1,000 ($500 if you make less than $20K a year).

If you have paid off all of your consumer debt, then you need to be working on building a full emergency fund of 3 to 6 months of expenses.

Once you have that full emergency fund built, you can then move on to investing for long term goals such retirement and paying for college for your kids.

3. Have Some Fun

You know what? When you are going full speed ahead in getting your money under control with a budget and paying off debt, it can feel like you just can’t afford to have any fun.

But you need to make room in your budget for some fun that’s appropriate for your current financial situation.  Put a line item in your budget labeled fun money”.

This should be a small percentage (maybe 1-2%) of your overall budget. This is an amount that’s designated for you to do anything you want.

My wife and I each get the same amount of fun money in the budget. My fun money goes mostly to help Starbuck’s.

The fun money is the oil that will keep your financial management engine running well.

Now What?

Financial success is not accidental. You have to take charge of your financial destiny.

You get to set the priorities, you get to tell your money what to do. Don’t leave it to chance and don’t think anyone else will do it for you.

Pay yourself first!

“The plans of the diligent lead surely to advantage, but everyone who is hasty comes surely to poverty.”
Proverbs 21:5 (NASB)

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Question: How will you start to pay yourself first?

Budget Priorities: If I Had To, What Would I Cut?

Budget Priorities: What Would I Cut?I have started to work on our household budget for February and this question came to mind: if I had to cut back on our spending, what would I cut?

The scenario that usually runs through my mind is this: what if I lost my job tomorrow? I am the primary income earner in our household so we would officially be in the middle of an emergency.

Well first of all, I would have to remember to protect the four walls: food, shelter/utilities, transportation, and basic clothing.

In our situation, we should be able to cover those 4 walls with our emergency fund.

So what would be cut or eliminated? In other words, what in our world would not be an essential expense?

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My Budget Cuts

This is my list. You have to evaluate your own financial situation and the priorities of your household. The key is making sure you know how to decide on needs vs. wants.

  • New Clothing: Meaning, we would not need to buy new clothing. We could easily make do with what we already have. Laundry/dry cleaning expenses would most likely be cut or reduced as well.
  • Restaurants: Well, with little or no income, we would have no business eating out so we would definitely cut this area almost completely.
  • Landscaping: We use a service to take care of our yard. We could eliminate this expense. It just means I would be spending a little more time outside :-).
  • Cable: We have a very nice TV package. We would look to eliminate or reduce the expense to just have the very basic channels. Just have to remember that there is not that much on TV that’s very good.
  • Internet Service: My wife and I both rely heavily on access to the Internet. The key here would be to identify the least expensive, most basic level of service.
  • Cell Phone Service: Initially I got a cell phone for emergencies. Now, it is really an useful tool and it also offers a degree of entertainment. Similar to the internet and cable service, I would need to look for the most basic service.
  • Entertainment: This covers items like going to the movies, sporting events, etc. Again in the middle of an emergency, this would be an area that we could really reduce in our our expenses.

There is one area which I did not address on my list but it would merit some consideration. That’s the area of giving. I have written before on how our generosity is not to be limited by the size of our bank account.

However, giving is very personal. You would have to evaluate very carefully and prayerfully what do in terms of giving if you are facing loss of income for an extended period of time.

In our case, I believe we would find a way to continue giving as part of monthly financial plan. I have faith that God would provide for our needs as He has to this point.

Question: If you had to do it, how would you adjust your budget?

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What if I don’t really have enough money to pay my bills?

What if I don't really have enough money to pay my bills?

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Have you ever been in that situation? I mean, you have worked on your budget, you have looked at every possible way to cut expenses.

And yet, you still don’t have enough money coming in this month to cover all the bills.

So what do you do? Of course one way to work on this is by increasing your income by working overtime or by taking a second job temporarily. But that may take a little while to setup and you still have to deal with this month.

As my mom would say, you have to find a way of stretching your dollar. So here are some reminders to help you deal with the challenge.

1. Remember to Protect the Four Walls

When your income is limited, prioritizing your spending becomes more critical. And you should always focus on protecting the four walls first.

What are the four walls? These are food, shelter/utilities, transportation, and clothing.

When there is food on the table and a roof over your head you can continue fighting. If the car payments are up to date and you have enough to fill up the tank, you can get to work and increase that income. And it’s a good thing to have basic clothing needs covered.

Money might still be tight but you can live to fight another day because the fundamental, basic needs are covered.

2. What about My Debts?

Let’s say that you have enough income coming in for the basic needs. But you might not have enough to cover all the minimum payments on all your debts.

One option of course is to prioritize your debts and spend your disposable income until you run out of money. This means that someone you owe won’t get paid this month.

For example, let’s say that after all your basic needs are covered you have $400 left in disposable income but the sum of all your minimum payments exceed that amount.

Here is the scenario:

Limited Income w/Current Monthly Payments

In this scenario, you have a monthly deficit of $373. You can only cover the first four payments on the list and partially the payment for the Master Card. Visa it’s below the line and gets nothing (actually, that’s an ideal scenario but that’s a topic for another post).

However, another option is to use a “Pro Rata” approach. In this scenario you budget your disposable income and every creditor gets a portion of it according to what percentage of your overall debt they represent:

Modified Payment Plan with Pro Rata Approach

Here, we have determined what percentage of the total debt each debt represents. We use that percentage figure, and apply it to your disposable income so every creditor gets a monthly payment.

Now it’s possible that they might complain and call about you not making the minimum monthly payment, but they will cash the check.

And remember, this is just a temporary measure while you increase your income. Eventually you will pay every debt on your list and you will move on to bigger and better things with your money.

3. What about Giving?

This is always a great question for dealing with our finances. I always advise to put giving as the first line on your budget.

But sometimes money is tight and you want to give but you don’t see how you can. Let me just remind you of a couple of things as way of encouragement.

First, giving should be a priority not because it’s an obligation but because it’s good for you. No one should give out of guilt or because it’s a rule. There is joy in giving and the amount is not important.

Second, you should only give as you have purposed in your heart. Yes, God loves a cheerful giver, but He also only wants what you have decided from a willing heart (2 Corinthians 9:6-8).

With Him, the condition of our hearts is what matters more than our external actions. If our hearts are in the right place, the right actions will follow.

Question: What other ideas do you have on stretching your income to meet your budget needs?

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5 Ways to Prevent a Shutdown of Your Finances

D.C. Shutdown

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This week the news cycle in the U.S. has been dominated by the shutdown of the federal government operations.

The funding authorization for those operations expired on Sep 30 without agreement between Congress and the President on how to move forward in the new fiscal year.

The result has been that non-essential operations of the government have been suspended while critical operations are still functioning. But the 800,000 federal government employees that are deemed non-essential, have been furloughed and sent home without pay.

If you look at recent financial statistics, about 75% of households live paycheck to paycheck. This means that they could not survive an extended period of time without income and would have to rely on debt to cover living expenses or emergencies.

A government shutdown is just one example of a loss of income. You could also experience an illness or family situation that prevents you from working for a long time. What would you do?

Here are 5 Ways to Prevent a Shutdown of Your Finances:

  1. Live on a budget so you can maximize your income and gain control of your spending.
  2. Prioritize spending to focus on the 4 walls: food, shelter, transportation, and clothing.
  3. Get out of consumer debt. In the event you lose your income, the last thing you want to worry about are credit cards or car loans. If you have those items covered, other non-essential things can wait.
  4. Build an emergency fund to cover 6 months of expenses. Give yourself a cushion to absorb the loss of income.
  5. Ensure that you have long term disability insurance. This is the type of insurance that would replace your income if you were to be disabled from working for an extended period of time.

Question: How would you handle the loss of income for an extended period of time?

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