electra-supply.com**Interviewer:** I’ve been hearing a lot lately about the importance of saving. It seems like saving and deposits have become key elements in financial management. Is prioritizing savings a good way to manage finances? What are the pros and cons?
**Interviewee:** Recently, there’s a financial strategy that has emerged called “Pay-Yourself-First Budgeting.” While it literally includes “paying,” it really emphasizes “saving.”
In essence, this budgeting approach encourages individuals to save money before they pay for essential bills like utilities or groceries, aligning with the current trend where more people are focusing on savings. There are certainly benefits to this approach, but there are also drawbacks.
Usually, people prioritize their budgets by paying for rent, utilities, groceries, and other essential needs first, and only save what remains after covering these expenses.
The “Pay-Yourself-First” strategy, however, takes a different approach.
**Interviewer:** Can you explain how prioritizing savings works in this context?
**Interviewee:** Absolutely. As the name suggests, this method involves putting your money towards savings first, and then spending the remainder later.
Mary Hines, a consumer and small business product executive at Bank of America, elaborates that this approach involves setting aside a portion of your paycheck into savings as soon as it arrives, rather than paying bills first and saving whatever is left over.
Hines emphasizes that while saving is a priority, it’s still essential to keep enough funds in your checking account to cover monthly necessities and reasonable small indulgences.
Andrea Woroch, a consumer and savings expert, notes that many individuals focus on paying monthly bills, which can lead to neglecting their savings. If expenses use up all their funds, there’s often nothing left to save. However, when savings are treated as a top priority, people tend to cut down on discretionary spending to ensure they meet their monthly savings goals.
**Interviewer:** How much should someone aim to save?
**Interviewee:** The amount to save really depends on individual circumstances. Hines advises that when adopting the “Pay-Yourself-First” budgeting method, it’s crucial to assess one’s financial situation, categorize expenses as necessary or discretionary, and set realistic savings goals based on either a specific amount or a percentage of income.
Kyle Enright, president of Achieve Lending, suggests that if you choose to save a percentage, experts often recommend saving 10% to 20% of income. If your situation allows, a higher percentage is better, but it’s okay if you have to start lower due to certain limitations—what’s most important is consistency.
For those who prefer a fixed savings amount, many might need to start small and gradually increase it. Even setting aside just $10 a week can accumulate to over $500 in a year; a savings plan of $100 a week can lead to over $5,000 in the same timeframe.
Hines reminds us that while consistency is key, it’s also important to remain flexible. As your financial situation changes—whether through increasing income, changing expenses, or new financial goals—regularly reviewing your savings plan can help ensure you stay on track.
**Interviewer:** What are some drawbacks of this strategy?
**Interviewee:** The “Pay-Yourself-First” approach has its pros and cons.
The biggest advantage is that it helps individuals stick to their savings goals and avoid overspending, contributing to overall financial security. Hines points out that by making savings a non-negotiable part of your budget, individuals can develop a habit of regular savings that leads to rapid wealth accumulation over time.
Experts generally suggest having an emergency savings fund that covers three to six months of living expenses, yet many people struggle to achieve this. According to a 2023 Federal Reserve survey, only about 54% of Americans have savings equivalent to three months’ worth of expenses.
On the downside, this strategy can limit financial flexibility and may require significant lifestyle adjustments.
Hines explains that to prioritize saving, individuals often need to alter their everyday spending habits, which can challenge their ability to enjoy their income freely. Although making these sacrifices may be difficult at first, in the long run, maintaining financial order enables a person to achieve future goals.
For those burdened with high-interest debt, prioritizing savings might not be the best approach. Enright believes that if someone has significant credit card debt with exorbitant interest rates, paying it off should take precedence—considering balance transfers or personal loans as options.
If someone is struggling to meet minimum payments due to financial hardship, he suggests considering “debt settlement.”
**Interviewer:** How can someone set achievable goals with this budgeting method?
**Interviewee:** Enright explains that the effectiveness of this savings strategy lies in viewing the budget not as a restriction on spending, but as a plan to achieve meaningful life goals. He recommends setting specific savings goals, ideally collaborating with a spouse or family member to outline these objectives. Typically, there should be two short-term goals—like buying a new TV, furniture, or planning a vacation—and one long-term goal, such as saving for a child’s college fund, purchasing a home, or planning for retirement.
Once individuals know how much they need to save, they can set up automatic transfers from their checking to savings account every payday to make achieving these goals easier.
Enright adds that it’s even better if employers allow employees to allocate a portion of their paycheck directly into a savings account. If that’s not an option, most financial institutions offer automated transfer services to facilitate regular contributions.
