In performing financial autopsies for my bankruptcy clients over the past 25 years I have noticed one common mistake people make. They fail to prioritize their money.

Priorities matter. Successful people have a common trait–they prioritize their day and do he most important tasks first. They write lists. They have WRITTEN goals for their day. They plan their day in advance, and then they go out an kick butt.

But when it comes to money, especially money in marriage, even organized people get messed up about how to set priorities with their money. Why is that?

I think part of the answer lies in those sappy marriage courses we take before our weddings.  You know, the ones that say how a man and women become one and cease to have separate identities. No secrets in marriage. Everything is shared. Mutual submission. Love is generous and we support one another give all that we have to each other. Sound familiar? And somehow out of this marriage class people conclude that in marriage you should have a single joint bank account that is shared and all money earned goes into it and all expenses are paid out of it. No secrets. Complete transparency. Mutual submission. Yeah, what could go wrong with this plan?

When all of your money sits in a single bank account you effectively have no money priorities.

It is moronic for a married couple to handle all of their finances out of a single bank account. This is pretend land. It’s crazytown. When all of your money sits in a single bank account you effectively have no money priorities. Buying pizza has the same priority as paying the mortgage or insurance or saving for emergencies because when money is not divided into separate accounts there is no priority to the spending, and that is just not true.

Some expenses are more important than others.  We all know that. Paying the mortgage or the insurance premium or saving for emergencies is vastly more important than paying for temporary needs, like a slice of pizza. And even if we verbally agree with this statement, if we just nod our head and do nothing more, then nothing has changed. Establishing priorities means taking action. It means dividing money into separate accounts based on their priority level.

The absolute key to money management is to divide money on payday.  Not one day later. Not one minute later. Automatically divide money on payday.  Put that on a tattoo.

The phrase “pay yourself first” is really just saying that you need to set money priorities. And when it comes to setting money priorities, it means dividing money into separate accounts. Here is how you do that.

  • STEP ONE: Write your Top Ten list.  Write down the ten most important monthly expenses. You already know what these are.  Mortgage/Rent. Car Insurance. Utilities. Cell Phones. Netfix (really, I’m fine with this being in the top 10). Child Support. Income Taxes. Daycare. Then, add up the list.  This monthly total must be paid. This is your priority. It must happen.  Leave out food, gasoline, pizza, and other day to day living expenses.
  • STEP TWO: Go back to Step One and add missing items. I bet a lot of you forgot to put Emergency Savings in your top ten list. (And I’ll bet those of you who didn’t ironically have no emergency savings!) And retirement savings? Was that in your top ten list? No? Why not? Do you plan on not retiring or is your plan to become a religious monk with a poverty vow? No? Well put that in the list. It’s important to have money when you retire, and if you are self-employed or are not eligible for a 401(k) plan, then put retirement savings in your list. Christmas? Did you put Christmas and holiday gifts in your list? No? Are you planning on being a Grinch this year? Or was you plan to put that stuff on a credit card, again? Really, it’s time to stop delaying the funding of expenses you know you have to pay.
  • STEP THREE: Align paychecks to monthly expenses.  After correcting your Top Ten list in Step 2 above, add up the new monthly total.  How much is the monthly priority spending total? Now, figure out how much of each paycheck you must set aside in a new bank account so that at the end of the money you have enough to pay this priority total. If possible, have that amount directly deposited from your paycheck into this new account on payday. If you don’t have direct deposit, then manually deposit the money ON PAYDAY.  It is supper important to divide money on payday! This must be automatic. The absolute key to money management is to divide money on payday.  Not one day later. Not one minute later. Automatically divide money on payday.  Put that on a tattoo.
  • STEP FOUR: Utilize your bank’s Bill Pay service.  Now that you have funded a separate bank account to pay the Top Ten list of most important monthly expenses, the next step is to have the bank automatically pay these priority expenses. Most banks and credit unions offer free Bill Pay services.  Learn how to use this system.  If you hate computers then go into the bank and have them set up the automatic payment. This is easy and necessary.  To prioritize money there must be automatic deposits into priority spending accounts and automatic payments from the account.

If you have completed these four steps above, congratulations on achieving priority-based money management. If you set up your system correctly, you are now saving money each month automatically. Your retirement is being funded and when holidays roll around the money is already saved to buy presents.  With each and every payday your emergency savings account should be growing, and it needs to continue growing until you have 3 to 6 months of your living expenses saved in cash. When bad things happen, when the car transmission needs replacement and your son breaks his leg trying to dunk like Kobe Bryant, you will be ready. Your mortgage will be paid of in 15 years instead of 30 since you now pay an extra $100/month on that expense because you decided to make that a priority.

Pay yourself first. Prioritize your needs first, your retirement first, your kid’s college savings first, your second honeymoon first, your family vacation first, your retirement first, and then worry about everyone else second. The money struggle does not go away, but you are no longer following the Thelma & Louise retirement plan. You still have to figure out how to pay back all those credit card and medical debts, and you will find a solution. But what you are no longer doing is sacrificing your future security for the temporary problems of today. You are back on the road of progress because you are paying yourself fist.

To budget money means to divide money. To budget means to prioritize. And to prioritize money means to divide money on payday into multiple bank accounts. Emergency savings account. Christmas/holiday/birthday savings account. Retirement account. Vacation fund. Top 10 monthly expense account. Day-to-Day spending account.

Don’t be afraid to pay yourself first. You are worth it. You work hard for your money. You made a promise to your kids and to yourself. Honor that promise. Pay yourself first.

Image courtesy of Flickr and Bradley Weber.