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Pay Yourself First

Which bill do you hate the most? The credit card? The rent or mortgage? Are there any bills you like to pay? If you are normal and sane, you probably hate all your bills. But I’d like to challenge that.

If you are financially wise, you’ll learn to love the first bill you pay each month. The trick is to pick the right place to start: with paying yourself. Paying yourself first is a concept that helps set your priorities and keep your financial house in order. It means that the first dollar of every paycheck gets spent on you. More specifically, the future you, by saving a healthy portion of everything you earn. 

In your budget, you have fixed expenses and flexible expenses. The first fixed expense must be to your savings. Decide your savings goal, then save that amount first—and it must be non-negotiable. 

Automatically pay yourself by scheduling regular payments to a savings account or retirement account. Make it happen before you spend a single penny. Then focus on staying inside your budget, keeping other fixed expenses to a minimum, and the rest is your flexible spending to use any way you like. Easy. (Well, easy to say, hard to do.) 

If savings are a flexible expense, they will rarely happen. Your money will disappear faster than donuts in a teacher’s lounge. The world's demands will consume your income before you save any of it.

Once you decide to pay yourself first, your next decision is how much. My suggestion is to work toward the goal of saving 15 percent of your money automatically when you get paid. Make that your priority on every single penny you make.

Paying yourself first will be difficult initially, but maintaining this good habit gets easier over time. Eventually, you’ll hardly notice it—until you wake up several years from now with a nice nest egg.

After you decide how much to pay yourself, the next question will be what to do with the money you save. Thankfully, that’s an easy one. Start by building your emergency fund. 

Ideally, your emergency fund will cover three to six months of living expenses. It must pay for the random and horrible crises that can hit you at the worst possible times, like a job layoff or serious accident for you or a loved one. (No matter how socially awkward your absence might be, a cousin’s wedding in Paris is not your emergency.) 

When your emergency fund is in solid shape, you can deal with crises that hit, not the resulting money problems. Should you ever deplete your emergency fund, this becomes your first savings priority again.

After establishing your emergency fund, the next thing is to put your 15 percent savings into a retirement fund. It can be through your employer, or you may need to open an IRA (Individual Retirement Account). Make this your second savings priority . . . if you’ve already paid off all credit card debt. 

Hopefully, you get an employer match on your retirement savings, which can instantly double your money. That’s a great deal, don’t pass up an employer match—ever. No other investment is this good. 

If you make an annual return of 30 percent in the stock market, the world will think you are a genius. However, you can make a 100-percent return or double your money just by getting an employer match on your retirement savings. And it’s sheltered from taxes. That should make you grin like the Cheshire Cat.

When you have a strong emergency fund, have paid off all credit card debt, and are contributing at least 15 percent to your retirement account, that’s when you can start saving for bigger things like cars, college tuition for kids, and that vacation to a tropical resort.

Financial freedom requires money, and you’ll probably never have any money unless you learn to set priorities and pay yourself first.

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Doug Lynam is a partner at LongView Asset Management in Santa Fe and a former Benedictine monk. He is the author of From Monk to Money Manager: A Former Monk’s Financial Guide to Becoming A Little Bit Wealthy — And Why That’s Okay. Contact him at douglas@longviewasset.com 

This material is intended for educational purposes only. You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. Nothing in this material constitutes a solicitation for the sale or purchase of any securities.

 Photo by Sasun Bughdaryan on Unsplash.