Paying Yourself First

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As a concept, this is done to death, but SO worth repeating!  It’s so easy to get caught up in paying everyone else that we don’t pay ourselves first.  But really, no one can get ahead without doing that unless some financial windfall happens.  Even then, if you aren’t in the habit of paying yourself first it’s easy to spend “found money” on unhelpful things (like upgraded sushi!).  I found it particularly hard to pay myself first when I felt my income was small.  (Small in this instance means when I was working for around $13,000 – 15,000 gross — and believe me, that was indeed gross!)  I have, though, picked up some simple habits that would apply even to meager incomes.

Know Why You’re Doing It:  I cannot overstate how valuable figuring this out was for me personally.  I wish I’d figured this out in my twenties, which were filled with nebulous notions of needing various piles of money so that things could happen for me later in life.  Retirement seems like a far away place when you’re 23 and home ownership seems like something older people do, lol.  I had no real savings targets or strategies other than “don’t bounce a check” and “try to put some away” without ever really thinking about what it was being put away for.  Consequently, I made some money mistakes.  For example, I let one of my first jobs after college cash out and mail me my little 401k investment once I’d left instead of rolling it over into an IRA.  It seemed so small and unimportant then.  Now, it’d be worth way more, even with no continuing contributions made to it.

Now in my mid-thirties, I have a much clearer sense of what I want out of life, and consequently how money is supposed to get me where I want to go.  I know, for example, there are certain financial moves I need to focus on to get rid of my divorce debt and student loan debt.  I know I need to come back to balance in my personal relationships and health practices.  I know what needs to happen now with my home maintenance so that a much bigger repair bill doesn’t hit me later.  Looking ahead into my 40s, I know that my primary goals financially will be to get rid of the mortgage for my 50th birthday as well as strengthening my retirement funds.  I also want to take a stronger community role by then, so that tells me what moves I need to make with my employment in order to have that kind of time available.  I love travel.  But thinking about what I want out of the second half of my thirties, I’ll probably only be able to afford one or two trips, and one will be to see my lovely Indian friend, Sreya, get married in her home country.  In my 40s, I want to go some place every year or at least every other.  That requires certain financial moves.  All this is to say that when overspending or underfunding tempts me, it’s good to remember what the overall goals are for this time in my life.  If nothing else, it distracts me and lets me think about those goals for a while, instead of getting dazzled by something sparkly or tempted by another piece of sushi.

Retirement:  This is not worth putting off until later.  I foolishly held the belief that it was sort of OK to wait until later to fully deal with retirement because “later” I’d have more money to put into a plan.  This is wrong thinking, because that $20 you find today at a younger age actually makes more money for you over the long term than that $50 I can pony up later.  The simplest way is to have that money debited straight out of your account regularly or taken out of your paycheck.  Even if it’s only a few dollars, starting it now and getting used to living without it is critical.  Pay yourself first for this now so a more vintage version of you can receive these payouts later.

Health Insurance:  Even if you only have an el-cheapo option, it’s worth keeping some kind of basic health insurance, as well as dental if it’s offered.  Medical costs can easily destroy an emergency fund, and an investment in this sort of thing can be a financial lifesaver.  I’ve never understood why people didn’t accept the coverage, even if it’s crappy and expensive.  Oh, wait, having been that person when I was making $13,000, yes I do.  It’s because it seemed to make my budget too tight.  Looking back on it, I took some awful risks with my health, and when I did have to pay for my own costs, I might as well have just amortized that cost over the year in the form of health care contributions.  I ended up paying for it just the same, only my way cost me more upfront and pinched the budget far harder.  Because of course a medical payment is going to come at the same time as, say, the car insurance bill.  Something for health coverage is far better and cheaper than nothing, or a four digit trip to the emergency room!  Don’t take the gamble.  It only works if you never get sick or go to the hospital, and you have limited control over that.  Pay yourself now so you don’t pay out big bucks later.  Since this money often gets taken out of a paycheck, you can learn to live without it.

Emergency Savings:  This is the hardest one for me because it requires the most self discipline and I cannot make use of the best tool to accomplish it:  direct deposit.  I am only paid for nine months out of twelve and my bills are such that taking the twelve month paycheck option sort of screws me at certain times of the year.  I’m better off budgeting my own money.  Unfortunately, that means I cannot just direct deposit money into savings and forget about it.  I have to do it myself.  Now, I take a weird pleasure in coming up with this money, but I’ve had to figure out where it’s coming from.  I do this by snowballing money into savings where I can.  When I refinanced, I was saving about $65 on the monthly note.  I snowballed that onto the credit card, and now that it’s gone, I shove that $200 into savings.  It ain’t much.  But it’s something.  Other “found” money goes into savings as well.  If I have leftover money at the end of a pay period (not often), I shove it in the account as well.  Once that account reaches a certain size, I’ll put it in a CD probably, if only to put another lock on the money before I reach for it.  Having to wait to take the money out helps me determine what is a true emergency and what is not.  If you can just direct deposit this savings out of your paycheck, by all means do so.  People like Dave Ramsey have noted that 90% of the time that we claim we’re going to make deposits manually (or pay extra principle or whatever), we don’t do it.  Automated is much better, if you can manage it.

Paying off loans faster:  There is a simple trick to doing that and it doesn’t involve refinancing.  Pay a bit more on the principle.  This can be surprisingly easy to afford.  For example, I didn’t think I could pay off my mortgage a full fifteen years earlier than its due date.  But it turns out by paying only $40 more on the note each month, I’ll cut that time in half, not to mention all the interest I’m not paying over the long haul.  So I really can give myself that 50th birthday present!  I wish I had done this with my student loan all along as well.  I do pay around an extra $40 on that note and have for the past few years.  But if I had been doing that since I left college, I would probably be extremely close to being finished with it now, instead of having another 8 – 11 years left on it.  The key is to pay more on principle at the same time you’re making the actual payment.  If you wait until the next day, they take a day’s accrued interest out of your extra payment.  Any little bit helps, but it seems the most bang for your buck is putting extra money towards principle as you’re making the actual payment.

At first I didn’t really think I could dig out an extra $40.  But there are several ways to look at that.  One is to break it into weekly thoughts.  I think I can figure out how to spare $10/week, for example.  Or to put it in terms of what it will buy that you are giving up.  If I’m giving up, say, coffee out for the month so I can be closer to owning my own home, that’s a powerful image in my head that helps motivate me.  Or, I can say I’m not going out to dinner and a movie twice this month so I can afford to have the house paid off faster.  Really, it’s about finding the little ways you’re nickel and diming yourself and start nickle and diming your loan instead.

These days I run my household on about $25,000 net.  That’s still not considered a lot of money by today’s standards, but it’s the most money I’ve ever made in my life.  I even own a cheap gym membership and I have cultural event tickets taken out of my paycheck!  Whoo hoo!  Even though I’ve made a few money mistakes, I have done a few things right.  I got a small but very comfortable home with a small and very comfortable mortgage.  I continued looking for ways to improve my education and marketability at the workplace, and thus landed a job that gives me benefits, meets my needs in terms of time off, etc., and offers a small but liveable salary.   I prioritized getting out of credit card debt and I figured out how to pay myself first.  My insurance and retirement come out of my paycheck automatically.  I have figured out a small amount to put towards principles on the two loans I have left to help pay those down faster.  I put aside money that’s gone back into my budget from paying off debt as well as “found” money.  I pay myself first.  Then I pay everyone else.

Barring some sort of unforeseen disaster, if I continue down this path, I’ll own my own home for my 50th birthday (instead of at 65 years of age), my divorce debt and student loan debt will be gone in about 5 – 7 years, and I will be on my way to a small but comfortable retirement.  In between, I will have seen something of the world on a glamorous shoestring budget, I hope to have made strong connections with my community, and enjoyed many hobbies besides.  What more could a little budget glamorous life want for?

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