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Savings Techniques: Pay Yourself First/Pay Yourself Last

In financial coaching sessions, clients often confront and focus on on issues of income, debt, and barriers for savings. Savings for low, medium, high, debt-ridden, and debt-free clients is is one of the most frequent problems seen by financial professionals and the focus of this article.

In financial coaching, through various probing questions, finding out what has proven successful and identifying current barriers for client savings and the client’s experience is helpful.  Some counselors hear that their clients have never saved, do not know where to begin to save, and claim they never have enough to consider saving. Exploring the client’s habits, attitudes, experiences, and illustrating several techniques and approaches to savings may be all the client needs to have cognitive enlightenment—their aha moment to embrace the idea they can save, be a “Saver,” and actually be very successful at savings.  

For some clients, regardless of their economic status, one of the first hurdles to identify is their own, unique definition of saving.  Some clients define saving as: putting money aside and not touching it, having money for emergencies, or having money for extras, such as holidays, vacations, etc.

Moreover, although some clients state they have saved once or from time-to-time, they are often left frustrated and defeated when they have to use or deplete their savings. They just do not even try to save anymore. This is where a financial coach can provide the client with a great deal of opportunity for change in habits and attitudes if the client has identified and is willing to change their savings goals.  

The client’s reasons for withdrawals and depletions should be explored. Two common reasons are impractical goals or emergencies. If the client was faced with an emergency and tapped into the funds to solve the problem, it’s important to assure the client that they achieved success. This reassurance is imperative and often overlooked.

A financial coach can explore more realistic and pragmatic strategies for savings if a client has previously set unrealistic goals for their savings plan based on their income and expenses.  It is not always necessary to assign a dollar amount or percentage to define savings. At times, money doesn’t matter. The coach’s role is to help clients identify a reasonable savings amount that is essential to their ability to meet their savings goal and with the new or renewed title of “saver.” These are tremendous insights and are all instrumental in the client’s awareness of their habits, attitudes, and experiences towards savings. Additionally, they are motivating factors towards the client’s feelings of accomplishment and success.

Second, several techniques offer awareness of pivotal opportunity for change. It may be one or a combination of techniques that jazz the client towards change.  One technique that financial coaches may introduce to a client with a savings goal is the Pay Yourself First (PYF) principle.  According to Investopedia, the Pay Yourself First (PYF) principle is defined as "automatically routing your specified savings contribution from each paycheck at the time it is received. Because the savings contributions are automatically routed from each paycheck to your investment account, this process is considered to be paying yourself first. In other words, pay yourself before you begin paying your monthly living expenses and making discretionary purchases.”

This is a principle that works if it incorporates all situations of employment and financial obligations and, again, practical and reasonable goals of the client. For this principle to work, exploring amounts that are small goals for savings may add to the probability of success. Smaller savings for PYF may safeguard and guarantee that their savings has reduced or minimal withdrawals. The PYF principle is often thought of and considered “out of sight, out of mind” and after initial set up, it is often completed without cognitive thinking or action, yet, it is a positive change that the client is accomplishing by saving!

There may be opportunity to optimize the client’s goal for savings change. Although PYF can work, exploring additional opportunities for additional savings may add to the client’s self-confidence. It is rare that a client can and has budgeted for every penny they have each month. Consequently, it is important to review and consider  end of the month saving possibilities. If there is a surplus from  actual monthly expenditures, does the client want to save this too? Can this surplus be included in savings in conjunction with PYF? If the client has made a conscientious goal that includes efforts and mechanisms to change habits, attitudes, and experiences, not exploring the surplus at the end of the month may be a lost opportunity. This can be insightful for the client.  Essentially, if the client’s approach to savings is PYF through automatic payroll deposits or other saving techniques, and the surplus can be reviewed for additional changes in their approach to saving, the client will understand and have the accountability and satisfaction of knowing where their money goes each month.

Unlike PYF, the Pay Yourself Last (PYL)  technique only has one goal—placing all money you have left at the end of the month to savings. It is important to note that , it is not a set amount and often changes each month.  Yet the client will have the cognitive reward of purposefully completing the task of savings and embracing the rewards for a job well done. This concept works well for clients with fluctuating incomes.    

So how does PYL, work?  The concept says it all…after you have paid for everything during the month, you save all the money that is left at the end of the month.  However, many clients struggle with checking accounts, communicating about debits, and eliminating overdrafts. Assigning and identifying a baseline balance in their checking accounts can eliminate some of these concerns. To assist clients with their confidence and reduce miscommunication and/or overdrafts, encourage the client to determine a baseline balance. The baseline balance is a balance that the clients agree will always be maintained in their checking account (that is their own unique goal).  The baseline balance when paired with PYL is illustrated below.

Example of Combining Saving Principles of PYL and PYF

A client gets paid once a month. He or she puts $20 into a Savings Account via Direct Deposit each pay period.  The client also has identified a Baseline Balance for the PYL principle of $100 for their checking account. This Baseline Balance is the minimal amount they will try to always have in their Checking account at the end of each month.

First Month:

Savings Direct Deposits for PYF = $20 ($20 x 1 pay periods)

After the client pays all the bills for month in this example there is a Checking Account balance of $126.40 left.  So with the PYL principle there is a Savings Account Deposit = $26.40 ($126.40 – $100.00 (Baseline Balance)).

Total First Month Savings in Savings Account  = $46.40 (PYF deposit ($20.00) + PYL deposit ($26.40))

Next Month:

At the end of the month there is a Checking Account balance of $109.65 so this time a Savings Account Deposit of $9.65(PYL) is made with still maintaining a Baseline Balance in Checking Account of $100.00.

Total Next Month Savings in Savings Account for this month is $29.65 (PYF deposit ($20.00) + PYL deposit ($9.65))

Combining the PYL and PYF principles helps the client to save twice a month – at beginning and end of the month.
 

While the ‘PYF’ principle would provide a $40 savings (meeting the client’s goal), including the ‘PYF and PYL’ provides an additional savings of $36.05 (26.40+9.65)  (exceeding the client’s goal = saving all they can and parallels with their goals, as well as achieves complete goals for change).  Ultimately, as illustrated, the savings balance on ‘PYF and PYL’ would be $76.05 (20 + 20 + 26.40 + 9.65) versus $40 ($20 + $20) with the ‘PYF’ principle.  

In conjunction with the ‘PYF,’ the ‘PYF and PYL’ is also easily incorporated in financial coaching if your client has electronic accessibility to transfer funds at the end of the month and start the next month renewed.  However, if this is not the case, clients attempting to incorporate the ‘PYF and PYL’ would need to exercise the discipline and customization for new behavior(s) for future deposits, i.e., going to their financial institution for savings deposits.

It is very important to remember that clients with volatile incomes have not or can not anticipate their financial needs or savings for the month until the end of the month. Utilizing ‘PYL,’ even as an isolated technique for savings, can and should assist them in savings and feel the success as a “Saver.”

While various concepts and principles are very relevant and successful for financial coaches and their clients, it is very important for financial coaches to actively listen to each and every client as they define their goals. It is also crucial for financial coaches to impart information to clients that align specifically and uniquely with clients’ values, goals, and action for planning changes in habits and attitudes towards savings. Clients who begin with small amounts of saving, often develop attainable and successful behaviors/habits for change and embrace the change in their attitudes and behaviors in watching their savings balance grow. 


Lori Mann graduated from ASU West as an adult learner in 2004 and retired from the state of Arizona, Department of Financial Institutions in 2014 as a Senior Examiner. Lori sought a position that would provide more opportunities for 1:1 financial assistance. In 2015, she accepted a position as a financial coach and moved to Canton, Ohio to work with as a Veteran Financial Coach under a joint contract with the Consumer Finance Protection Bureau and Armed Forces Services Corporation. After obtaining her AFC, Lori obtained her FFC in 2017. Lori is honored to serve Veterans as they obtain and maintain their financial success and be a part of their journey as they look toward their future with financial literacy, success, and savings.

The Standard

4th Quarter 2018


Thank you to this issue's contributors:

David Allen Ammerman

Jerry Buchko, MA, AFC®

Lori Mann, AFC®, FFC

Andre Milteer

Brent A. Neiser, CFP®, AFC®

Margaret S. Sherraden, Ph.D.

Michael G. Thomas Jr., Ph.D. Candidate, AFC®

Rebecca Wiggins

 

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