Tag: budgeting

Many people approach budgeting in this fashion: Pay bills, spend a little, and any money that’s left goes in savings.

But those leftover crumbs aren’t often enough. Not prioritizing saving may be the reason nearly a quarter (23%) of Americans don’t have any money in savings, according to a recent financial literacy survey conducted by The Penny Hoarder. Of those surveyed, about 40% reported having less than $1,000 saved up.

One way to save more for the future is to prioritize saving over everything else when creating your budget. Some refer to this approach as reverse budgeting, while others call it the “pay yourself first” budgeting strategy. However you think of it, focusing on saving first can pull you from the rut of not saving at all and reset your approach to personal finance

What Does It Mean to Pay Yourself First?

Paying yourself first isn’t really a budget. It’s a way to reset how you handle monthly income to make savings goals a priority. Setting aside “pay yourself first” money for savings accounts can shift your mindset and help align financial goals with how you want to spend money.

Mark Charnet, founder and CEO of American Prosperity Group in Pompton Plains, New Jersey, suggests saving about 10% of your net income — the money you receive after taxes, health care premiums and 401(k) contributions are taken out — each time you get paid.

If you can’t afford to put away 10%, start smaller. The bills never stop, and it’s not like you can tell your credit card company you can’t pay this month because you’re working on your emergency fund. We get it.

Why You Should Use the Pay-Yourself-First Method

How you divvy up your savings depends on your individual needs, but here are a few things you should focus on when using the pay-yourself-first budget.

Setting Up an Emergency Fund

Will you have enough money the next time your car breaks down to cover repairs? Or how about when you have to move for your next job opportunity? Emergency funds are designed to take care of big-ticket variable costs that live outside of your monthly expenses.

Increasing Your Retirement Contributions

If you checked the balance in your retirement account recently and gasped, you’re not alone. A 2022 Bankrate survey indicates 55% of Americans reported being behind or significantly behind in retirement contributions. Paying yourself first can be a good way to get back on track.

Paying High-Interest Debt or Loan Payments

If you’ve dug a deep hole of credit card debt and are struggling to get out, paying yourself first can help. Putting 10% or more of each paycheck toward paying down your high-interest debt or loan payments can help you shrink that balance fast.

Preparing Your Savings Account or Checking Account for a Big Purchase

Speaking of big events, if you need to buy a car in the near future, divert a larger amount of cash toward that goal. Saving up for a home or sending a kid to college? Simply increase your savings contributions for “pay yourself first” each pay period. Just be sure you have enough to cover living expenses.

How to Pay Yourself First in 4 Easy Steps

Identify Your Financial Priorities

If you’re unsure of the best way to save money for the future, Charnet recommends talking to a financial adviser like a certified financial planner.

“(Those just starting to save) should not feel embarrassed or make the assumption that (they’re) too small of a fish for a financial adviser,” he said. “That is absolutely not true.”

Set a Reasonable Savings Goal

While paying yourself first is a good strategy for building a savings vehicle that can deliver a brighter financial future, take care not to be too ambitious upfront. Set a reasonable goal that won’t leave you taking on debt or dipping into savings to take care of everyday expenses like utility bills.

Transfer Money Automatically

Automating saving can help you set aside money without having to think about it. Adjust your direct deposit at work so a percentage of your check automatically goes to savings. Or schedule automatic transfers from your checking account right after you’re paid.

Keep an Eye on Your Bank Account

After your savings are deducted from your income, you can focus your budget on bills, necessary expenses and discretionary spending.

You may find you have less money for extras — like entertainment or eating out — but if you pay yourself first, you’ll be in a better financial situation to face the future, instead of scrambling to come up with money when you truly need it.

Combine Pay Yourself First with Other Budgeting Methods

While paying yourself first can get your financial priorities straight and change your spending habits, it’s also not a budget. Check out some of the most popular budgeting methods to learn more about which methods complement a pay-yourself-first or reverse budget strategy.

Kaz Weida is a senior writer at The Penny Hoarder. Nicole Dow is a former senior writer at The Penny Hoarder.

If you’re married or living with your significant other, there’s a lot you share. Your home. Your weekend plans. Perhaps even a kid or two.

But just because you’re sharing a life together doesn’t mean you have to share the same bank account. Having separate bank accounts in marriage or a serious relationship may be the perfect solution to harmonious money management.

Having separate bank accounts isn’t an indication that you’re not connected as a couple. In fact, there are plenty of valid reasons why a couple might choose not to merge finances.

6 Reasons Why a Couple Might Want Separate Bank Accounts

1. You want to quit being sneaky about purchases.

2. You have different income levels.

3. You have different spending habits or money management styles.

4. You’re used to having financial independence.

5. You’ve been burned by a former partner.

6. You want to protect assets for your children.

1. You Want to Quit Being Sneaky About Purchases

When you share bank accounts with your significant other, they see every time you swipe your credit card, spring for an online purchase or make a withdrawal from the ATM.

Sometimes you might want a little financial privacy — whether you’re trying to surprise your honey with an anniversary gift or you just don’t want them to know exactly how much you spent on a new pair of shoes.

The Penny Hoarder conducted a survey in 2021 on people’s budgeting and spending habits and found that nearly 1 in 4 respondents said they’ve kept a purchase secret from their significant other in fear of how they’d react.

Keeping significant financial secrets from your spouse — like racking up a bunch of debt on secret credit cards — can be harmful to your relationship. However, if you just crave a little autonomy to spend money (responsibly!), having a separate bank account can help.

2. You Have Different Income Levels

If you earn significantly more than your partner, you might get frustrated to see them spend your hard-earned cash on purchases you don’t agree with. If you earn less, you might be bothered feeling as if your partner is micromanaging your spending.

You can avoid feelings of resentment or annoyance by coming up with a fair way to split the household income and shared expenses — and then letting each person have the financial independence to manage their own money how they see fit.

3. You Have Different Spending Habits or Money Management Styles

Another reason you might opt for separate bank accounts is if you and your other half have dissimilar spending habits or money management styles.

Maybe you enjoy spending money on experiences while your husband prefers to buy the latest tech. Perhaps your girlfriend finds it easier to use the cash envelope system to stay on budget while you hate carrying cash and can’t function without checking your budgeting app every day.

Rather than trying to convince your partner to see things your way — or getting into constant arguments about the balance of your joint accounts — it might be better to just maintain your own individual accounts.

4. You’re Used to Having Financial Independence

As couples wait to get married until later in life, it may be difficult to adjust to merging finances after having sole control of your bank account.

“If you’re getting together in your 30s or 40s or later, you’re used to doing things how you do it and that’s what’s comfortable for you,” said Isabel Barrow, director of financial planning with Edelman Financial Engines.

Maintaining separate bank accounts may be what’s preferable.

There’s also the concern of losing your money management skills if you hand over the reins to your spouse to take care of paying the bills and handling the investments. It can be helpful for both to stay connected to managing their money individually rather than to have one partner who does it all.

5. You’ve Been Burned by a Former Partner

Past experiences can have an emotional impact on our money mindsets.

Barrow said she’ll often see couples who are in a second marriage choose not to open joint accounts or merge other assets.

“I think that a lot of times it’s just to give them peace of mind knowing that they’re free to spend and to save how they choose,” she said. “They may have had disagreements in their prior marriage about money or maybe that was something that led to the divorce, and then they’re left feeling vulnerable financially and they just don’t want to go down that road again.”

If your former partner was financially controlling or irresponsible with money, maintaining your own savings account may give you peace of mind — even if your new spouse or significant other doesn’t demonstrate the same behavior.

6. You Want to Protect Assets for Your Children

Couples who get together later in life and have children from previous relationships may choose to maintain separate accounts and assets in order to pass wealth down to their own kids.

If you want to protect inheritance money or gifts, it’s helpful to put those financial assets in a trust, Barrow said. Assets held in a trust are more likely to be protected from being split between spouses in the event of a divorce.

4 Tips to Successfully Manage Money Separately

Keeping finances separate in a relationship requires a little extra work. Here’s what you need to know as you go forward with this financial arrangement.

1. Have a Plan for Shared Expenses

If you decide to keep your funds separate, you need to have a plan for how you’ll handle shared household expenses.

“Every couple needs to have a system that works for them,” Barrow said. “Once you find it, stick with it.”

You might decide to have each partner cover a particular set of bills. For instance, your spouse might take care of paying the rent and student loans while you cover child care and groceries.

Another option is to split the bill for everything. Money transfer apps like Venmo and Cash App make it easier to reimburse each other for shared expenses. However, Barrow finds that constantly splitting the check can grow tedious and lead to bickering or resentment.

What she recommends is for couples to open a joint bank account for shared expenses while each maintaining their own separate accounts. The amount of money each contributes to the joint account should be based on the percentage of the combined household income that they earn.

For example, if you make $60,000 and your partner makes $40,000, you should cover 60% of shared expenses while they contribute 40%.

2. Keep Important Accounts in Both Names

Even if you pay the bills separately, it’s important for both people in the relationship to be named on the mortgage or rental agreement — especially if you’re unmarried.

“If … you’re not married and [the home] is in one person’s name, there is a chance that if the one whose name is on the mortgage passes away, the unmarried partner can get booted out of the house,” Barrow said.

The same rule applies to utility accounts. You don’t want to break up with your boyfriend and also have your electricity and water cut off, because he was the only one listed on those accounts.

However, if you have Netflix in your name and your significant other is named on the Spotify account, it’s not as crucial to make sure those subscriptions are in both people’s names.

3. Separate Accounts Won’t Necessarily Protect You if You Split Up

Just because you have money put aside in your name only, your spouse could have rights to those assets in the event of a divorce.

For married couples in community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — all assets and debt are considered shared marital property and are generally divided evenly in a divorce, regardless of whose name is on the account.

Most states are equitable distribution states, which means that assets acquired during the marriage are to be “divided fairly but maybe not equally,” Barrow said.

Entering into a prenuptial agreement before you get married means you and your spouse can mutually agree on how you’d want their assets divided instead of being subject to state laws.

4. Take Time to Plan for the Future Together

When you and your spouse manage finances separately, you may not see your overall financial picture as clearly as couples with a joint bank account.

That’s why it’s important to have open conversations about money and to be on the same page about financial goals. If you are married or in a committed relationship, you should know how much money your partner makes, what debts they have and what their spending habits are like.

Make financial transparency a regular part of your lives by implementing a monthly money date or family budget meeting.

“Even if you’re keeping the money separate, you should be planning together,” Barrow said. “You need to together determine what your spending limits should be or what your savings goals should be.”

Nicole Dow is a former senior writer at The Penny Hoarder. Senior writer Robert Bruce contributed.

Do you wish you had more money set aside? Not a rainy day fund for unexpected expenses but something that could cushion the financial stress of a major life event.

When Nora Martin was expecting her first child, she wasn’t going to let all the many baby costs bring her down. She had a plan.

“I pretty much wrote up everything that we needed… and then split up the total over six months to see how much we would have to save each month to get to our goal,” Martin said.

This practice of splitting a large financial goal into easier-to-manage chunks has a special name in the personal finance world. It’s called setting up a sinking fund.

What Is a Sinking Fund?

A sinking fund is a pool of money you regularly contribute to so you spread out the cost of an upcoming expense over time. It is different from an emergency fund or a standard savings account because a sinking fund is specifically earmarked for a large expense or big-ticket item.

The term “sinking fund” comes from corporate finance lingo. Businesses set aside money in a sinking fund to repay debt or a bond or to prepare for a large capital expenditure.

But you don’t have to own a business to benefit from this money-saving strategy. Learning to add sinking funds to your budgeting approach is a smart strategy to save up for big money goals, future financial obligations and recurring bills outside of regular monthly expenses.

Why Do I Need a Sinking Fund?

Why set up a sinking fund versus dumping all your money in one of your other savings accounts and calling it a day? Here are a few reasons to start a sinking fund account.

Sinking Funds Help Manage Large Expenses for Major Life Events

Saving money in a sinking fund helps you manage upcoming costs that would overwhelm you if you neglected to plan ahead.

If you don’t have a great deal of disposable income each month, it might be tough — if not impossible — to cover a big expense all at once. For instance, if you waited until December to buy Christmas presents and planned to spend about $800, you might be forced to charge the expenses on your credit card to make it happen.

If you set aside money over time in a separate savings account as a sinking fund — say, $100 a month for eight months — you can avoid going into debt or having to borrow money.

Sinking Funds Save Emergency Funds for Real Emergencies

Having a sinking fund also helps you avoid dipping into your emergency fund when (non-emergent) big expenses pop up. Likewise, you don’t have to pause your progress on other money goals, like paying down long-term debt or investing for retirement.

Sinking Funds Can Help Weather the Storm of Variable Income

Sinking funds make upcoming expenses more manageable. And when it’s time to actually spend the money, you can do so guilt free because you know you’ve been saving up specifically for that purchase.

Sinking funds are also a lifesaver if you have variable income. It can be tough to budget if your income fluctuates from month to month. With sinking funds, you can put money aside during high-earning months and use that cash during low-earning months.

Types of Sinking Funds You Can Add to Your Budget

The sinking fund categories you’ll add to your budget will depend on your individual needs and desires.

In general, there are three types of sinking funds: planned goals, recurring costs and indeterminate future expenses.

Planned Goals Sinking Funds

Some sinking fund examples that would be considered planned goals include:

• Vacations
• Weddings
• New baby expenses
• Down payment for a house
• Down payment for a new car

These are typically one-time expenses you’ll budget for and can stop saving toward once you’ve reached your targeted amount.

Recurring Costs Sinking Funds

Some examples of recurring expenses you might want to set up sinking funds for include:

• Car insurance premiums
• Car registration renewals
• Home insurance premiums
• Christmas gifts
• Birthday gifts
• Holiday expenses
• Back-to-school shopping
• Summer camp fees
• Self-employment taxes
• Yearly subscriptions
• Computer software renewals
• Annual fees for credit cards

These are costs you know will come up around the same time each year and need to plan for on an ongoing basis.

Indeterminate Future Expenses

Indeterminate future expenses are expenses that are bound to happen but you can’t plan when they’ll occur or exactly how much you’ll need. These can include:

• Medical expenses
• Car maintenance or car repairs
• Home repairs or maintenance
• Appliance replacements

Do your best to estimate how much you’ll need. Reviewing your past spending in these categories can help.

The Difference Between a Sinking Fund and an Emergency Fund

You should have your emergency fund separate from your sinking funds. They are not the same thing and ideally should be kept in separate savings fund accounts.

Sinking funds are for planned expenses you can anticipate. Emergency funds are a safety net that should be used only in situations that are urgent, important and unexpected.

For example, you’d use your sinking fund money on plane tickets to visit your mom for the holidays. But if your mom got into a car accident and you needed to book a plane ticket at the last minute to help her with her recovery, that’s when you’d use your emergency fund.

How to Save Money With a Sinking Fund

It takes a little math and some organization, but it isn’t difficult to save using sinking funds.

First, you need to figure out the total amount you want to save. Then divide that number by the amount of time you have until you’ll need to spend the money. This will give you the amount you’ll need to set aside in your sinking fund every month (or week or pay period).

For example, if you want to save $1,000 for a vacation over 10 months, you’d need to add $100 to your vacation sinking fund each month. If math isn’t your strong suit, you can use one of the online sinking fund calculators to figure it out.

Since sinking funds typically cover short-term savings goals, you’ll want to be able to access your money easily. Keep it in a high-yield savings account or money market account with attractive interest rates. Those who prefer the envelope method may keep their sinking fund savings in cash.

If you manage your money with a budgeting app, you can set up your sinking funds digitally. Mint is one of our favorite budgeting apps that doesn’t charge monthly fees.

For longer-term goals, a certificate of deposit, or CD, is another option to store your money and watch it grow — but only if you know you won’t need to withdraw it before the CD matures. You’ll get hit with penalty fees by taking your money out earlier.

While you’d potentially get the greatest return keeping your savings in a brokerage account, that’s usually not recommended for sinking funds because of the risk of losing your savings due to stock market volatility.

5 Tips for Success With Sinking Funds

Become a pro at using sinking funds with this advice.

1. Separate Your Sinking Fund From Your Main Checking Account

It’s helpful to keep your sinking fund money in a separate account so you don’t wind up spending your savings on Uber Eats or impulse purchases at Target.

2. Name Your Sinking Fund Accounts

Giving your sinking fund a name — like “Italy trip” or “house of my dreams” — can help motivate you to keep saving money and not dip into it for something frivolous.

3. Automate Your Savings Transfers

Streamline the process of saving by setting up automatic transfers or direct deposits into your sinking fund accounts so you don’t even have to think about doing it. Once you have a sinking fund setting on your checking and savings accounts, it will be easy to automate transfers.

4. Apply Windfalls to Sinking Funds

If you receive extra money — such as a bonus or tax refund — don’t wait. Add it to your sinking fund today to accelerate your progress toward meeting your financial goals.

5. Prioritize Multiple Savings Goals

When you list out all the reasons you have to start saving funds, putting money aside for all of these expenses may seem overwhelming. Prioritize needs — like taxes and insurance bills — over wants — such as vacations or holidays. And know you don’t have to save up for everything all at once. Establish a plan for reaching your money goals that is feasible for you and your financial situation.

Kaz Weida is a senior writer at The Penny Hoarder. Nicole Dow is a former senior writer at The Penny Hoarder.