Implementing PAYGO Rules For Personal Finances

Last week, Sen. Jim Bunning of Kentucky created quite a stir when holding out his vote for extending unemployment benefits. His contention was that it violated the self-imposed PAYGO (pay-as-you-go) rules that Congress and the President reinstated just a month earlier. Bunning eventually caved and the benefits were extended, but just because the government can’t operate under PAYGO doesn’t mean we the people can’t.

Photo by robson2313

PAYGO requires new federal spending to be offset by budgetary cuts or tax hikes. Makes sense; without paying as you go you will surely wind up deep in debt, which is exactly how we find our country. As most things political go, PAYGO seems to be more for show, as politicians on both sides have ignored their own rules, or taken advantage of lapses in PAYGO, to spend like maniacs.

Since the idea of debt first came along, people have opted to borrow versus saving for a variety of reasons. Farmers often needed to borrow money for seeds and tools to produce their first crop. Many business were started with loans, because they had significant upfront costs that owners were unwilling or unable to cough up. Homeowners cannot usually afford to buy a house for cash, so we choose to take out a mortgage.

These examples all seem relatively easy to justify, but then a little tool came along called the credit card, which made it much easier for households to borrow money for everyday items. With credit cards, the idea of paying as you go became nearly obsolete.

Every now and then I hear stories of someone who built their own home. They often saved up to buy some land, then the materials, then completed as much as they could on their own while saving to pay someone to finish up those things they lacked the expertise or physical ability to do themselves. I’ve always admired these types; not only for their self-reliance, but because they understood the pay as you go way of managing your money.

My wife and have implemented PAYGO in our own household, on a smaller scale. A few months ago we agreed not to sign up for any new subscriptions, or add to our recurring monthly expenses, without canceling something equivalent.

For instance, after living for more than a year without cable television to speed up our get out of debt plan, we decided to sign back up for basic programming. Doing so would add about $30 to our monthly budget. To pay for it, we scaled back our Netflix membership (a $10 savings), canceled a weekend newspaper subscription (I can read it online – $10 saved), and I canceled a forums membership I no longer participated in (at $9.99/month).

In our example, we eliminated two things that were no longer useful to us, or that we no longer enjoyed, so it wasn’t too big a deal. However, we have had times where we wanted to add a new service or subscription, and couldn’t identify we were willing to eliminate. Enter the other side of the PAYGO equation: Increasing income.

The government can increase income by raising taxes. Fortunately, we don’t have the ability to levy a tax on others and collect their money, so we have to raise the funds ourselves through work. If you receive a raise at work, you may want to allocate a small percentage of your new income to adding something to your household that would add value.

Perhaps you’d like to listen to audio books on the road to increase knowledge on a particular subject. Or maybe there is a cooking class you’d like to attend, or a gym membership could help relieve stress. Whatever it is, use a small percentage of your new, monthly income to reward yourself. Notice I said “small percentage.” There is a risk here of lifestyle creep – inflating your lifestyle to meet or exceed your new income. Tread carefully.

By implementing a pay-as-you-go system in your personal finances, you will not only avoid debt, but you will be able to take pride in the things you own because you really own them, they don’t own you.¬†And yes, that’s right out of Tyler Durden’s Guide to Personal Finances.

*This article appeared in the Carnival of Personal Finance – Tour of Ireland edition

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