Trail Financial Planning, LLC is a fee-only financial planning and investment management firm located in Bellingham, WA

Pay Yourself First – put extra cash flow from tax reform to work!

Pay Yourself First – put extra cash flow from tax reform to work!

I noticed in February.  My paycheck was higher than normal.  Sweet!  It wasn’t the result of a raise; rather, it was a reduction of taxes withheld, in anticipation of a lower tax rate due to the 2017 Taxes and Jobs Creation Act (TJCA).  Many people can expect to see their federal income tax bill lower in 2018.  If you are employed, you might be seeing the additional dollars already.  If you are self-employed, perhaps your estimated tax payments for 2018 will be less.   

What should you do with the extra money? 

Buy organic lip balm instead of regular?  Get a second hair cut every month?   Buy a new Audi convertible?      

Or maybe, should you increase your monthly mortgage payment?  Pay down student loans?  Increase savings for your kids’ college or retirement?  Give to a worthy charity?

Most of us spend what we earn.  Imagine your monthly budget is like filling a bath.  Water pours in (income), and water drains out (expense).  Rinse and repeat.  Most people I know don’t experience overflowing bathtubs.  It is a rare event to say, “Oh goodness, I forgot to turn off the water, and now my checking account is so full that money is spilling over the sides!  Hee-hee, how wonderful!”

No, we are humans!  We tend to spend what we have.  There is probably some deep-rooted evolutionary biology, or psychological imperative to explain this, but all I know is that it happens for me.  I notice a direct correlation between the balance in my bank account and thirst I have for new stuff.  

Here is my advice:  pay yourself first!  Don’t give the “new money” to the lip balm company or your hairstylist or a car company.  They probably already get some of your money.  Make your future self one of your recurring bills.  This is a strategy to harness the behavioral tendency to spend what we have.  Of course, you should also enjoy the life you live today.  My rule for family budget increases is:  50% for now, 50% for later.  That way, I also feel like we are living for today. 

Steps:  1)  Figure out how much extra you have per month.  2)  Choose an important future need.  3)  Set up a regular payment scheme so the new money “disappears” from your account before you even see it.  Don’t make yourself have to decide every month what to do with extra money, because if you do, it will just go down the drain.  Make paying your future self a habit!

That’s what I did, I just bumped up the monthly savings rate for my kids’ college funds.  Last year, I increased monthly contributions into our Roth IRA accounts.  If you are unsure of of which priority to fund first, or what account type to choose, or how to invest the money in the account, you might want to consult a financial planner.  

Bathing is an important part of life, but don’t “take a bath” on your budget.  Organize, prioritize, then pay yourself first!  

John Chesbrough

I am a financial planner and investment manager. I also am the owner of a fee-only, independent financial advisory firm called Trail Financial Planning. I enjoy working with people who care for others and their community – parents, firefighters, therapists, doctors, nurses, and teachers. I may be spotted at through my blog or on the many winding trails of Whatcom County. To learn more, or contact me directly, please visit my firm's website: