“Pay yourself first” is popular wisdom in the world of personal finance. The idea is simple: Every time you make money, you must save (or invest) a fixed amount of that income before doing anything else. Then, you can spend the rest however you like, guilt-free! By prioritizing saving over everything else, you’re “paying yourself first,” and you’ll always meet your saving goals. Some people add another budgeting layer, giving themselves a specific plan for the spending money as well.

This all sounds pretty smart at first, but we’ve actually never done any of it. In fact, we accumulated wealth much faster and retired early by taking the exact opposite approach: We paid ourselves last.

Whenever we made money at work, we would spend only as much as we needed to live a happy, fulfilling life (which we found isn’t all that much). Then, 100% of the remainder would be invested, ultimately buying us freedom and making work completely optional.

When we made extra money or found another way to cut our expenses, we didn’t level up our discretionary spending to compensate — we just saved even faster.

Budgets are for Beginners

Traditional budgeting strategies work best for people who plan to operate on thin margins. If your goal is to save 5-10% of your income so you can retire comfortably when you’re 65, any of the oldschool budgeting methods will probably be fine.

By clearly budgeting the amount you plan to save, you’ll never underperform your minimum goal — so that’s cool. The problem is that the remainder of the cash will always get spent, regardless of whether it’s necessary or truly beneficial. After all, it’s considered “extra” money in your budget, so you might as well spend it, right?

On the other hand, if you’re a reader of this blog, you’re probably thinking about how to invest 50-80% of your income and retire decades younger so you can enjoy the best years of your life the way you want to. Your concern is how to absolutely max out that savings rate and achieve financial independence as soon as possible. So why put a limit on your saving?

When you “pay yourself last” instead of sticking to a specific budget or saving schedule, you’ll treat every purchase with the consideration it deserves. You’ll realize that every dollar you don’t spend is one dollar closer to lifelong freedom (plus interest!).

Thinking this way builds a mental muscle that encourages faster saving and continuous happiness optimization. It makes you reflect on what’s truly important to you and eventually stop wanting more “stuff” than you really need. That’s a recipe for a richer life — in more than just the financial sense.

Make Saving Money a Game

Traditional budgeting can sometimes make you feel like you’re on a restrictive diet. When you’re on a budget, it can seem like saving money is the thing keeping you from doing what you want.

Once you change your mindset and realize that saving money is exactly what will allow you to do the things you want (instead of sitting in an office 5 days a week for the rest of your life), it gets way more exciting.

For us, saving and investing started to feel like a game we were playing everywhere we went. The amount of money we saved was dependent on our spending and our earning, and we were constantly going for the “high score.” Our new obsession became finding ways to spend less and make more.

Photo of Lauren with Starbucks
Lauren happily pouring some of our homemade cold brew coffee from our camper van’s cooler instead of buying a cup from Starbucks.

We engineered our lives so that we could get by with just one used car and a couple of bicycles. We figured out creative menu hacks to score cheaper food at restaurants. And we earned more money by job hopping into better-paying careers and doing (somewhat ridiculous) side hustles like credit card churning.

The “score” of this game was measured by a monthly net worth check-in. Each month, we wanted to see as big of a positive change as possible. Teaming up to try and beat our previous record was a fun challenge that brought us closer together as a couple.

If we had a traditional budget with preset saving goals, we would have just seen the same, monotonous amount added each month as we counted down the fixed number of years to retirement — boring!

More importantly than that, if we had committed to investing a fixed percentage of our incomes, it probably would have been something within reach early in our journey, like 50%. But by banking all excess income (whatever that may be) instead, we actually increased that number unexpectedly and saved more like 80% of what we made in higher-earning years. We didn’t put a limit on our savings.

By the way, the difference between a 50% savings rate and an 80% savings rate is 10-11 years of additional work! In other words, if we had stuck to a strict budget, we might have actually delayed our early retirement by close to a decade.

An Example of Budgeting Fallacies: Vacation Planning

Consider another piece of classic personal finance advice for vacationing: plan a trip months in advance, estimate its cost, add that into your budget, and earmark money for your trip each month until you hit that goal in a special vacation savings account.

There are a few things we personally hate about this way of thinking.

First of all, if you budget $3,500 for your vacation, guess how much you’re gonna spend while you’re away? At least $3,500 — regardless of whether you really need to. Once money is designated for a specific purpose, people have a psychological tendency to spend it all, no matter what.

“We scored a sick deal on our flights and saved $400,” people will say, “so we were able to take that $400 and spring for the upgraded suite at our hotel!”

In reality, money is fungible. You don’t have to spend money on your vacation just because it was in a savings account labeled “vacation savings.” If you can take a great trip for less than you planned, the rest of that money can be kept, freeing you from mandatory work sooner.

When you “splurge” on something unimportant and luxurious just because “it’s in the budget,” you’re really shortchanging yourself. That money could have been used to buy something more valuable instead — freedom.

Secondly, setting up your budget so that every extra expense needs to be planned for in advance takes a lot of joy and spontaneity out of life. Imagine instead having so much excess cashflow that you could pay for a vacation of any length on a whim, because your baseline expenses were so low to begin with.

Most of our vacations are planned just days ahead of time, if at all. We’re apt to capitalize on great deals or once-in-a-lifetime opportunities immediately as they arise, because we aren’t beholden to any specific budget.

But when we travel, we also find creative ways to do it absolutely as cheaply as possible. Especially during our accumulation years, we realized that every dollar we could avoid spending would be left over to buy us the freedom to take our next trip (or make our next investment).

Use the Sweepaway Method to Keep Accounting Simple

If you’re a “Type A” person, this whole “pay yourself last” thing might sound like a disorganized nightmare. How do you know when to invest excess money? How much? What’s the system?

Allow me to alleviate your concerns with a simple accounting strategy that we call “the sweepaway method.”

The idea behind “paying yourself last” is that you’re always keeping your spending as low as you can, while satisfying your needs. By doing this, you’re left with tons of excess money from every paycheck that never gets spent.

That money will naturally pile up in your checking account, where it won’t be earning any meaningful return. To prevent that from happening, you’ll want to decide on a target balance for your checking account, and “sweep away” the excess on regular intervals.

For example, we have all of our bills set to auto-pay from our checking account. If we keep a minimum balance of about $5,000 in it at all times, there is no chance of an overdraft — we just don’t spend that much in a month.

As income pours into our checking account, its balance exceeds that $5,000 threshold. And then about once a month, we sweep all that excess money away to a more productive investment account, leaving the checking account with a clean $5,000 baseline balance again.

Graphic of pay yourself last budget
Your income fills up your checking account until it starts “overflowing” beyond its target balance. From there, regularly sweep the excess cash away to a high-yield savings account, high-interest debt balances (like credit cards), lower-interest debt balances (like mortgages), and investment accounts, in that order*. If you want to be aggressive about debt payoff, you can choose low-end balance targets for your checking and savings accounts to get started on your debt faster.

The specific place that you “sweep” your excess money away to will depend on where you are on your financial journey. If you haven’t accumulated an emergency fund of cash in a high-yield savings account yet, you might want to sweep excess money there first. It’s always good to keep some easily-accessible cash on hand.

Once you have a few months’ expenses in a savings account, the rest of your excess cash should be shoveled into high-interest debt like credit cards or student loans (starting with the highest rate), until it’s all gone.

Once you’re free of high-interest debt, then you might start sweeping money into lower-interest debt like your mortgage balance, or your investment accounts if you prefer. Since we’ve always been debt-free (including mortgage debt), 100% of our excess cash has always gone directly into investments.

By strategically sweeping excess money out of your checking account, you’re ensuring that it’s always working as hard as possible for you. And if you’re the type of person who is tempted by a big checking account balance to spend more, this method will mitigate that temptation.

If an unusually large expense pops up, like a hospital visit or a dead HVAC system in your house, you can pay for it out of cash balances in your checking and savings accounts first, and then promptly refill them afterward, in the standard order — no sweat!

Optimize Your Spending First

With all that said, I should mention that “pay yourself last” is an advanced financial strategy. If you’re not yet at a point where your expenses are way lower than your income, then you need to work on that first. Drive an older car (or ride a bike), get a roommate, cut your insurance and TV bills, eat food from Walmart and Costco, and work some side hustles — just do whatever you can.

Once you achieve a wide gap between what you spend and what you make, consider ditching your budget altogether. It’s less stressful, and if you’re anything like us, you’ll probably end up saving even more as a result!

Or, if you have a different budgeting method that’s already getting you exactly the results you want, feel free to just ignore all of my rambling. You gotta do what works for you.

— Steven

* One possible exception to this order of operations is investing in an employer-matched retirement account, like a 401(k). Claiming a contribution match from your employer often represents an instantaneous 50-100% return, so it probably makes sense to prioritize this one specific investment above everything else.

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