Budgeting – Pay Yourself First!

Last week I talked about creating a schedule for your budget.  If you missed that post, you can get it HERE.  This week‘s topic is paying yourself first.  This is important on two levels.  First, when you pay yourself first, you are directing your business by setting a goal for it to achieve instead of just taking whatever is left at the end of the year.  Second, this keeps you in control of your finances instead of your finances controlling you.

I talked about setting your vision in a previous post, available HERE to review.  Today’s post expands on one aspect of that topic, paying yourself first.  When you are developing your budget, you need to set your profit and cash flow goals when you start.  This gives you something to work toward.  You will make better decisions on what to include and what to exclude in your budget when you pay yourself first.  Without a goal, the tendency is to include an item because you would like to have it.  By having your goal set before you begin, instead of just including the item, you will ask yourself how including the item will affect your goal.  This will help you get more money to your bottom line.  You have the final say on your budget, so don’t feel that this is going to limit what you do.  This gives you the chance to make your choice intentional, knowing it is going to affect your bottom line.

This is also a great motivational tool.  Your goal can be a percentage increase over the previous year.  It could be a step up goal that increases the size of the prior year’s increase.  You get the idea.  You can also use the profit goal to help keep you focused on achieving the goal as you work your way through the year.  This will also help motivate you to keep your books current throughout the year.  You don’t know how you are doing in the game if you don’t know the score.  You also can’t make adjustments to help you make budget if you don’t know where you stand financially.

The concept behind paying yourself first also applies to how you operate your business through the year.  You want to ensure that the cash flow you generate actually makes it to the end of the year.  Here is a trick you can use.  Each month, based upon your budget, pull the projected cash flow amount out of your checking account and move it into a savings account.  This will keep you from spending money you should be saving.  You need to do this before you pay all your bills for the month.  If you don’t have a budget you won’t know how much to put away.  It also helps to have a set time of the month to pay the majority of your bills.  This will allow you to take a look at what has come in and what is due.  Pay your bills when they are due, not just whenever you receive them.

Treat the savings account like a bank.  If you need to draw some money out to pay a bill because you are short one month, figure out how you are going to repay the loan from your savings.  If you are disciplined with this you have a high likelihood of achieving your cash flow budget for the year.

Paying yourself first is a great way to help you stay in control of your business and put more cash in your pocket. 

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