Recently I’ve been thinking about my financial strategies and how to boost my savings so that I can really start to invest in income producing asset classes.
I have just finished reading “Rich Dad, Poor Dad” (how belated of me), and I have been consumed with thoughts of employing strategies that will eventually give me true financial freedom.
Sure, I have been blessed enough to be able to pay all my bills, even take a few vacations here and there. But a tendency to use credit cards on items that seem small at the time adds up to my remaining behind the credit card eight ball each month.
Somehow a hundred dollars here and two hundred there, adds up to thousands. I should not be surprised by this, being a math major and all. Ha ha.
So each month I throw my excess money at my credit card, but that means that my excess money is not headed into my savings, which is my tool for future investments.
Sure, I save in various retirement accounts every month but that savings account that I intend to use for investments such as real estate has been stagnant for a while.
I know something needs to change and I have been wondering if it is my mindset that is holding me back!
So I’ve been putting some thought into my money approach and I want to share some insights on each approach to help you to choose the one that’s best for you.
Pay Yourself First?
Pay Yourself First really translates to “Save First before you do anything else” or “Make Saving a Priority”.
I wholeheartedly agree with the thought process, but oftentimes get caught up in the mindset of scarcity (which I am desperately trying to shake).
The mindset of scarcity worries that there won’t be enough left over to pay bills and debt obligations.
Tweet ThisI have a friend who vehemently supports the “Pay Yourself First” Mantra. She believes that is the best way to prioritize yourself and your goals in a world where most people have some sort of bill or debts to pay.
David Bach in this article on Business Insider argues that paying yourself first is the only way to true wealth.
By the partial definition here, most people with an employer sponsored retirement account pay themselves first each month since their contributions are made before they are paid. Their paycheck already has some amount of savings removed from it.
The part that confuses most people is whether paying yourself first means blatantly ignoring your bills and saving almost all your paycheck. I have read and heard varying degrees of extremity on this topic.
Pay Your Bills and Debt First?
In this strategy, you pay your bills and creditors first, then save some amount of whatever is left.
This strategy can absolutely work if you a) don’t live paycheck to paycheck c) aren’t carrying huge amounts of consumer debt such as credit cards and auto loans and c) have the discipline to not blow every dollar that is left over after paying your bills.
Things get dicey for the folks who need every dollar they make each month to pay their bill and debt obligations. It is even worse when we are only talking about the minimum on debts like credit cards and student loans.
In this case, short of increasing income or decreasing a fixed expense such as mortgage or rent, it is very hard to break out of this cycle.
So what should you do?
Seeing Green.
The answer lies in an intimate understanding of your financial situation.
If you have true excess money left at the end of the month, paying yourself first will just ensure that you don’t end up blowing your money frivolously on entertainment and miscellaneous spending.
It also depends on your tolerance for leaving bills and debts unpaid while you “pay yourself first”. For some people, that is a pretty hard concept to swallow as they are loathe to consider a creditor calling and demanding money. They also would not want to risk the prospect of a late payment to their credit reports.
I don’t think you should have to do that, there is a hybrid approach that can work for most folks.
Examine your financial situation. If you have been using a budget for a while to track your income and expenses, you should have a pretty good idea of how much money you truly have left at the end of each month.
Commit to saving as much as you can of the leftover money out of your first paycheck each month in an account that you cannot easily access. If “as much as you can” sounds too vague, start off with saving 50% of that excess. (Or any random number you choose, just save something.) Save this before you pay anyone.
If you live paycheck to paycheck, start thinking of ways to increase your income or reduce the biggest expense most of us have, our housing payment. You can do this either by moving to a cheaper place or taking on a well vetted roommate to reduce your housing expenditure.
That move alone will free up hundreds of dollars to pay yourself first.
It’s pretty clear that my financial philosophy does not allow for ignoring my bills to “pay myself first” but I think the perfect strategy is to make enough money while keeping your bills low enough that you can both “pay yourself first” and still have enough to pay all your bills each month.
What do you think?