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Pay
Yourself First?
by Gary Foreman of The
Dollar Stretcher
Some
months I can save some money and some I can't. I have heard the
saying "always pay yourself first". When I do that it
seems that I have to withdraw that money later on in the month
to pay the bills. So how does this actually work? Should I
always pay myself first?
Any help
would be appreciated.
James
James is
trying a strategy that many people use to force themselves to
save money. Instead of saving whatever is left at the end of the
month, they 'pay themselves first' at the beginning of the
month. And, surprisingly, there are a lot of families that swear
by this method.
Why does it
work? It seems that in nature certain events will continue until
they run out of fuel. Wild fires are an example. They will
continue burning until there's nothing left to consume.
Your
expenses can work the same way. Many families will continue
spending until all the money is gone. No matter how much money
comes in some bill or new purchase will take it. Raises and
bonuses all seem to vanish without a trace.
In other
families expenses will consume all the money and the credit,
too. Again, there will never be any money available after all
the monthly minimums are paid.
Paying
yourself first turns this problem into an advantage. If you take
1% of your income and put it in a savings account at the
beginning of the month, the amount of money available for
spending is less. At the end of the month you'll wonder where
all the money disappeared. Just like you do now. Only this time
you'll know where at least 1% of it has gone. It's sitting in a
savings account earning interest.
For some
people this plan works wonderfully. Their spending seems to
automatically adjust without any real effort. They have a little
less in their pockets and so they spend a little less. One less
candy bar or impulse buy. It just seems to work out. Gradually
they begin to accumulate savings. Unfortunately, James doesn't
appear to be one of those people.
Remember,
the idea of 'paying yourself first' doesn't create any magic.
You'll still get a bill from the electric company each month.
And they'll expect you to pay it.
James'
problem could be in a couple of places. Perhaps he's getting to
the end of the month and won't cut back on unnecessary expenses.
A certain amount of self-disciple is required. You need to
resist that candy bar. Empty pockets are an acceptable part of
the deal and an incentive to stop spending.
Another
possibility is that James has tried to save too much. It could
be that he hasn't left enough money to pay for the basic monthly
expenses. In that case, he'll either need to make some
adjustments to his basic expenses (like selling a second car) or
plan on paying himself less each month.
Unexpected
repairs and expenses could also be sinking James' plan. You know
the kind I'm thinking of. The ones that we all know will happen.
We just don't know when or how much they'll cost. Home and auto
repairs are often the culprit.
Your budget
plan needs to cover this type of expense. Put some money away
each month for these 'big hit' expenses. If your car is getting
old, protect yourself by putting $100 away each month. You'll
need it for that 'unexpected' $1,000 repair bill.
Where James
puts his savings is important, too. It's really wise to have two
savings accounts. One that's readily available for those big hit
expenses. Don't use this money for a fishing boat or a new
spring outfit! It's for repairs and expenses that you cannot
avoid.
The second
savings account is your long-term savings. It should be harder
to get at. Only take money out in a true emergency. This money
should be for long-term goals like a college education or
retirement.
There's a
question that James didn't ask that could affect his success.
That's whether it's better to put money away in savings or to
pay off credit card balances first. Does it make sense to put
money in a savings-type account earning 6% when you'll be paying
three times that much in interest on your credit card balance?
Some people
think so. They believe that once you've started to save money
you'll continue to save. And there's some truth to that. Using
your savings account for the unusual expenses gets you out of
the habit of reaching for a credit card when a crisis occurs.
But, it
does seem a little crazy to be borrowing money at a higher
interest rate than you're getting on your savings. Achieving a
debt-free lifestyle is important, too.
There's
another way to look at the issue. Reducing your debt is actually
a way of saving money. For every dollar that you repay this
month, you'll reduce next month's interest charge. So you've
really saved money by paying part of your credit card balance.
Sure, the
next time your car breaks down you'll probably need to pull out
the plastic to pay for the repair. But, if you've developed the
habit of reducing that balance each month, you'll get right back
on track.
One final
thought: Starting a 'pay yourself first' program is always
easiest when you get a raise in pay. Just take the increase and
put it in your savings account. You'll still have the same
amount of money available as you did last week. But, don't let
the lack of a pay raise keep you from starting. You can begin
with $5 this month. Most of us spend that much impulsively
sometime during the month.
Should
James continue to pay himself first? That depends on what he
hopes to accomplish with it. If he's looking for the strategy to
magically reduce his mortgage payment he'll be disappointed.
But, if he's hoping to give himself that little extra incentive
to reduce expenses at the end of the month he'll do quite well.
Gary
Foreman is a former Certified Financial Planner who currently
edits The Dollar Stretcher website www.stretcher.com/save.htm
and ezines. You'll find hundreds of free articles to help you
save time and money. Visit Today!
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