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


  1. Excellent topic. I’ve often wondered if there is much difference between PAYGO and just simple balanced budget. I suppose one could argue that PAYGO demands either an expense cut or an income increase to offset the new expense vs. a balanced budget simply allows you to shift money from one category to another as long as expenses never exceed income. The end result is much the same either way.

    The house building photo and your mention of cash homebuyers reminded me of a story Dave Ramsey likes to tell on his radio show occasionally. It’s about a young couple who, fresh out of college and earning $80,000 a year decided to make a very odd choice by our societies standards. Rather than taking out a mortgage immediately and buying new cars, they rented an over-the-garage room from a well-to-do older lady for really cheap (I think it was $300 a month) and they helped her out with some basic household chores. This included all utilities and use of the house’s facilities (kitchen, spare bath, etc). They lived so frugally that they were able to live off her salary ($30K) and bank his ($50K). After three years they bought their first house for cash. Imagine yourself at age 25, young, healthy, and debt free with a paid-for house. These ‘kids’ showed us how it can be done. Can we sacrifice to achieve victory? You bet!

  2. When I switched jobs last year, I got a significant pay raise, and we did choose to spend a small percentage on some things that are important to us but that we couldn’t justify before. We now buy soymilk only for my partner (as opposed to cheaper cow milk that he doesn’t like), organic cow milk for me (something about those antibiotics…), and organic/fairtrade coffee. We did cut down the amount of coffee we drink now that we buy the really good stuff, though.

  3. We did this. We are the PAYGO home builders. We built a log home, very similar to the one in your picture, ourselves from scratch using the PAYGO method. We bought our first home as a fixer-upper, did extensive remodeling and sold it at enough of a profit to buy some land and put up a barn that we parked a 5th wheel in to live in while we built our log home. We’ve been here almost 10 years now, and have added on a little at a time to the original 3000 sq. ft. — now we have a sunroom, attached garage and a bonus room over the garage. It is immensely satisfying to sit in our home and know every little detail was done with our own hands, by us — a true handmade original. Bonus is when something needs fixing, we know right where to go to find the source of the problem.

    The Log Home Builders of North America — is where we went to learn the craft of log home building and they featured us as one of their “homes of the month” several years ago. I am ready to do this again, and we may be building another home within the next few years.

    I kind of chuckle when people say they are “building” their house. Most likely they are “having a house built.” There is nothing quite so satisfying as getting in there, rolling up your sleeves and doing it yourself and avoiding a mortgage in the process.

  4. This sounds like an excellent strategy. I find myself now scaling back on things that I absolutely don’t need (newspaper subscription, for one) and the money that I save from that I am able to substitute for something of equal value. As I am nearing retirement, this PAYGO system takes on more urgency for me.

  5. I really like the idea of eliminating one expense before adding another. It’s like reducing clutter, which I’m also a big fan of. The only difference in this case is that it’s financial clutter that you’re getting rid of, while also helping to prevent lifestyle creep.

  6. Luv the photo of the house… reminds me of my house project. Paid cash for an old small fixer upper. Paid cash for the repairs as I went. Walked thru unsheet rocked walls for awhile, and on subfloors for a year til I had cash to finish things up. THis summer I pour the 30×8 cement patio 🙂 Cash, of course!

    Only way to fly! 🙂

  7. Sounds to me you are cornering and containing Lifestyle Creep!

    That the problems with being totally debt free, We now have the extra money to spend, so some people like us left “Lifestyle Creep” or “Lifestyle Inflation” consume the financial advantage that they have by being debt free.

    I refuse to be a victim of LifeStyle Creep, but I’m one of 2 adults in our household!

    I like your idea of PAYGO, I’ve never heard of it before. I will discuss both PAYGO and the creation of Dividend Funds with my wife.

    Thanks, it’s always a good day when I learn something new!!!

  8. Excellent. Especially the part about lifestyle creep….it’s amazing how that happens to people. People never think they make enough money and are always looking towards that next pay raise to solve all their problems…which never happnes. We implemented the “drop one expense before adding another” method a few years back. When my wife wants to add a luxury, I then ask her what she wants to cut to make room for it in the budget….she rolls her eyes and we have a laugh. I love being responsible. I wish more people (and our governmen) did too. It’s so rewarding:)

  9. This is eerie since my husband and I just had this conversation over the weekend.

    He’s almost done with grad school and wanted to know if we could use a little of that monthly money to increase our “fun” money. I explained that we had been “stealing” the monthly grad school money from the amount we used to put towards the emergency fund…so using it for “fun” money would be counter-productive.

    We then started discussing what extra expenses we could cut so he would have enough to cover all his hobbies at the same time. The quick answer was to simply lower my allowance to $50 and increase his to $100 since I never use all $75 anyway. I’ll raise mine back up when our income increases this August.

    Before anybody starts judging my husband, it was my idea. He’s a sweety. I just didn’t want to cut into our other luxury expenses (like restaurants…that’s my crack), so this worked.

  10. @Lisa: That’s incredible! I thought I remembered you mentioning building your home before. I’d love to buy some land and do something similar, though I’m afraid my lack of home building skills might hamper us. I suppose I could get smart on it!

  11. Implementing PAYGO style rules is an interesting spin on managing personal finance. Thank you for the idea.

    It is so easy to nickel and dime your way into overspending, and I know that my husband and I have been guilty of that in the past.

    I admire a neighbor of ours and the way he and his wife manage their money. The only debt they have is the mortgage and the wife’s car, which is leased. He rides a CanAm Spyder to work, and he paid for it outright. (This is a $20K motorcycle) He’d been looking at getting one, and just like everything else he and his wife buy, he saved up the money for it and bought it with cash.

    The thing is they don’t live an austere life. They have nice TVs and computers, and all of that stuff…they just don’t buy anything until they’ve saved up the money for it.

    This is the way my husband and I are trying to be going forward. I only wish I had realized how important it is to save money and to stay out of debt as much as possible earlier in life.

  12. Just paid the last tuition payment for our child yesterday under our paygo plan. In order to do this we had only one child based on our income and realized that if we took out student loans it would be years to pay off. He went to a state school in town and lived at home the first 3 years. He paid for books and we paid tuition. Now he will graduate without any loans for either of us.

  13. Excellent post. I got a subscription offer today for Business Week. I decided not to do it after reading about the paygo plan and saved 30 dollars in the process.

  14. I dunno….. PAYGO isn’t working very well in the Senate. It is all for show, and obvious no one intends to abide it. Can it work for individuals? Yes, if they follow rules to the letter. But if they adopt the habits of the Senate they’ll be in bankruptcy court.

  15. There are lots of things that I can forgo – but I think writers should be the last people to let their local newspapers go. Yes, bloggers make tons of money off of ads- but the reality is that we need people to be paid to get out there and get the news. I am sorry that it seems to be a common thing for blog writers to not care about their newspaper counterparts. No, I am not a writer, but I do appreciate that someone looks for and reports to me the local news (or national or international).
    yes, I like PAYGO- but I think we have to be aware of the “buy local think global”