Pay yourself first: How you can overcome the challenge of saving

Pay yourself first: How you can overcome the challenge of saving

pay yourself first

One of the oldest rules of personal finance is the simple admonition to pay yourself first. All the money books tell you to do it. All the personal finance blogs say it, too. Even your parents have given you the same advice.

But it's hard. That money could be used someplace else. You could pay the phone bill, could pay down debt, could buy a new DVD player. You've tried once or twice in the past, but it's so easy to forget. You don't keep a budget, so when payday rolls around, the money just finds its way elsewhere.

And besides: What does “pay yourself first” even mean?

To pay yourself first means simply this: Before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account. The first bill you pay each month should be to yourself. This habit, developed early, can help you build tremendous wealth.

Why Pay Yourself First?

If you're just getting started in the Real World, saving may seem impossible. You have rent, a car payment, groceries, and maybe student loans. Sure, you'd like to save, but there's just no money left at the end of the month. And that's the problem: Most people save what's left over — left over after bills and after discretionary spending.

But if you don't develop the saving habit now, there are always going to be reasons to delay: you need dental work, you want to go to Mexico with your friends, you aren't making enough to pay your bills. Here are three reasons to start saving now instead of waiting until next year (or the year after):

You're Prioritizing Saving

When you pay yourself first, you're mentally establishing saving as a priority. You're telling yourself that you are more important than the electric company or the landlord. Building savings is a powerful motivator — it's empowering.

You're Developing Good Financial Habits

Paying yourself first encourages sound financial habits. Most people spend their money in the following order: bills, fun, saving. Unsurprisingly, there's usually little left over to put in the bank. But if you bump saving to the front — saving, bills, fun — you're able to set the money aside before you rationalize reasons to spend it.

You're Prepared for Money Emergencies

By paying yourself first, you're building a cash buffer with real-world applications. Regular steady contributions are an excellent way to build a nest egg. You can use the money to deal with emergencies. You can use it to purchase a house. You can use it to save for retirement. Paying yourself first gives you freedom — it opens a world of opportunity.

I've never met anyone who does not wish they had started saving earlier. Nobody tells themselves, “Saving was a mistake.” No matter what your age, begin saving now. And if you already save, consider boosting how much you set aside each month.

How to Pay Yourself First

The best way to develop a saving a habit is to make the process as painless as possible. Make it automatic. Make it invisible. If you arrange to have the money taken from your paycheck before you receive it, you'll never know it's missing.

Part of your savings plan will probably include retirement, but you should also save for intermediate goals too, such as buying a house, paying for a honeymoon, or purchasing a new car. Here are three easy ways to begin doing this yourself:

  • If your employer offers a retirement plan — such as a 401(k) — enroll as soon as possible, especially if the company matches your contributions. Matched contributions are like free money.
  • Starting a Roth IRA is one of the smartest moves a young adult can make. These accounts allow your investments to grow tax-free. Because of the extraordinary power of compound interest(and compound returns), regular investments in a Roth IRA from an early age can lead to enormous future wealth.
  • Open a high interest savings account at a bank like Capital One 360 or FNBO Direct. Set up automatic transfers into this account, either directly from your paycheck or from your regular bank account. Treat these transfers like you'd treat any other financial obligation. This should be your first and most important bill every month.

Putting “Pay Yourself First” into Practice

For many people, saving is tough. Between housing, utilities, groceries, transportation, credit-card debt, student loans, and other expenses, there never seems to be enough left to set aside for long-term savings. And that's the problem. Most people try to save something out of what's left over instead of saving first.

But what's the best way to do it? What's the most effective way to pay yourself first?

While I was writing Your Money: The Missing Manual, I benefited greatly from the advice of Dylan Ross, a Certified Financial Planner (from Swan Financial Planning) and a long-time GRS reader. One thing Dylan stressed over and over was that I was looking at savings wrong. I kept writing that you should take whatever money you have leftover in checking at the end of the month and move it to your savings account.

“There's a better way,” he told me. “People often have more success if they put money into savings first, and then transfer what they need to checking.”

It took me a while to understand what he was trying to say; it seemed like he was splitting hairs. Now, however, I realize that Dylan was espousing the true spirit of “pay yourself first”.

Savings First

This probably seems a little vague to many of you. How would you actually go about following Dylan's advice? Here's a simple three-step process to make savings a priority instead of an afterthought:

  • Open a high-interest savings account. Although “high-interest” is something of a misnomer lately, eventually it'll make a difference. I use ING Direct for my savings, but there are many other great options. (If you're curious, you can read more than 1700 GRS reader reviews of high-yield savings accounts here.) I'm a fan of keeping my savings account at a different bank than my checking account — it just makes it that much harder for me to tap my savings on a whim.
  • Deposit your paycheck to your savings account. If possible, have your paycheck automatically deposited. (The more you can automate this process, the easier it will be to save.) This is the key to Dylan's plan. By putting the money into savings instead of checking, you don't have “extra” cash sitting in your bank account at the end of the month that can be mindlessly spent on other things. Plus, the money's already in your savings account, so you don't have to remember to move it.
  • Set up regular transfers from savings to checking. Based on whatever system you have — a detailed budget, a rough guess based on last year's spending, whatever — schedule monthly (or weekly) transfers into your checking account to take care of routine expenses. The money left in savings stays in savings.

The difference between the checking-first and savings-first systems may seem trivial, but Dylan swears it works. As he reviewed the manuscript to my book, he flagged every every instance where I encouraged readers to save by moving money from checking to savings. “You have it backwards, J.D.!” he said.

Another Variation

I have my own method of paying myself first, and it's similar to Dylan's advice, but on a bigger scale. I don't pay myself first with each paycheck; instead, I try to front-load my saving every year.

That is, for the first few months, I save as much as I can. I set money aside for retirement, taxes, and other goals. I'm more frugal during the first half of the year, and there isn't much left over for indulgences.

Once I've set aside all the money I think I'll need, I'm able to loosen up and spend more on the things I want. I still save more throughout the year, but after I've met my initial goals, all other savings are a “bonus”.

How to Overcome the Challenge of Saving

The real barrier to developing this habit is finding the money to save. Many people believe it's impossible. But almost everyone can save at least 1% of their income. That's only one penny out of every dollar. Some will argue that saving this little is meaningless. But if a skeptic will try to save just 1% of his income, he'll usually discover the process is painless. Maybe next he'll try to save 3%. Or 5%. As his saving rate increases, so his nest egg will grow.

If you're struggling to find money to save, consider setting aside your next raise for the future. As your income increases, set your gains aside for retirement and savings. Once you're contributing the maximums to your retirement (and you've built emergency savings), you can begin to use your raises for yourself again. Sure, this means your effective salary will stagnate for a year or three or five. But it also means you'll force yourself to develop the saving habit.

Example: My wife is a perfect case study. She started by having 8% of her pre-tax income set aside in her employer's retirement plan. As her salary increased, she increased the amount she saved, routing it to various retirement accounts. Because she never saw the money in her paycheck, she never missed it. Now she saves 30% of her income, and she receives a 6% employer match! How did she do this? By paying herself first. (I should note that Kris just came to me the other night for advice on how to save even more. My wife is awesome.)

5 Ways to Pay Yourself First

If you are just starting to manage your money or you simply struggle when it comes to budgeting in the first place, paying yourself first may seem like one of those personal finance concepts that sounds good in theory but is difficult to put into practice in reality.

Fortunately, you can start small, get some good habits in place, and scale up from there. Here are five strategies to help get the ball rolling so you can start paying yourself first.

Strategy 1: Reduce Your Spending and Bank the Difference

The first step in implementing this strategy is similar to how you start to budget:

1. Figure out where your money is actually going. Using an app like Mint may help you identify and categorize your major expenses. (Full disclosure: Mint is at its best if you use a debit or credit card for all your transactions. Cash spending is a little trickier, though not impossible, to track.)

2. Figure out what to cut or reduce. Maybe you downgrade your cable package to a plan that doesn't have the premium sports channels, switch to a no-contract cell phone plan, and increase the deductible on your auto insurance to lower your premium.

Now comes the trick:

3. Bank the difference. Add up your monthly savings from the changes and set up an automatic transfer to your online savings account for that amount. After all, what is the point of saving money if you don't actually save it?

This can be addictive! If you channel your savings into one sub-account, then as you see it grow each month, you may be inspired to make even more cuts so you can increase the amount of your transfer and watch the savings grow.

Strategy 2: Start Small

But maybe that first strategy sounds intimidating though you aren't sure you can actually save that much each month (especially if you're currently spending more than you earn). If you really are starting from nothing, part of the problem may just be a matter of perspective. It's unreasonable to think that you'll go from zero to thousands of dollars in savings overnight.

Instead, try starting with $20 per month. Surely you have that much to spare, right? Set up an automatic transfer for that amount and see how it feels. This is actually how I started to save money, although it was for a different reason.

Back in the day when I opened my first savings account, an automatic transfer of at least $25 per month was required for the account fees to be waived. That's no longer the case, but the transfer was already set up, so I never changed it. See? Laziness working in my favor!

Here's the trick with this strategy:

Once you've been successful doing this for a month or so, bump that amount up. Can you save $40? $50? More? You'll realize when you've hit your limit. And while the amount you are saving may not seem like much in the beginning, starting easy with something you can accomplish is kind of the point. Plus, the balance will grow quicker than you think!

Strategy 3: Bank Your Side-Gig Income

So you've got a side gig or second job. You're in good company! Anyone can start a side business these days. But where does the money from your supplemental income go? If the answer is to your regular checking account and you're still not saving any money, you may be able to put those funds to better use by funneling them directly to a savings account.

If it's a second job, then go ahead and set up direct deposit to go straight to a savings account. Out of sight, out of mind — until you log in and admire your new-found savings! If your side gig is your own business, then hopefully you've got a business checking and savings account set up so you're not mixing those funds with your personal money.

Keeping personal and business funds separate can make tax time easier and help you determine whether your side gig is successful. It also makes it clear how often you are paying yourself and how much you're earning. Better yet? When you cut yourself a paycheck from your business, deposit it into your savings account rather than your checking account. Bank it, baby!

Strategy 4: If You're Coupled Up, Live Off One Income

This one's simple too. If you're a member of a dual-income couple, then try to live off only one of your incomes. In this scenario, one of you has their paychecks direct-deposited into checking, while the other (preferably the higher earner, but do what works for you) has their paychecks deposited into savings.

A true one-and-done, this strategy probably enables saving the most money, and doing so very quickly. But here's a couple caveats to remember: Obviously, both parties should have access to both accounts, and you should both be on the same page when it comes to saving and spending goals. Communication is key here.

However, assuming that is the case, the sky's the limit. This strategy is especially effective for those who are planning to go down to one income at some point anyway — for example, those who want one spouse to stay home with a future family. Even if you don't have plans to become single-income in the works, an accident or illness may make the decision for you, so it's best to be prepared.

Strategy 5: Participate in Your Employer's Retirement Plan

OK, this one is kind of a gimme, but it bears repeating. If your employer offers a 401(k) or similar retirement plan, you should be contributing! Saving for retirement is the ultimate form of paying yourself first.

The benefits are numerous. You may reduce your taxes in the here and now. You allow compound interest to work its magic on your behalf. If your employer offers a match, you literally get free money! I'm not seeing any downsides here.

Plus, participating in a retirement plan through your employer is another one-and-done method of saving. Rather than having to remember to do something every single month, you fill out the forms, turn them into HR, and — boom! — you're providing for your future self. What could be simpler?

Further Reading

No matter what your age, you should make it a priority to develop a regular saving plan. Establishing this habit early can lead to increased financial security later in life. But even those of us who got a late start should do our best to pay ourselves first. I didn't begin doing this until just a few years ago. Better late than never.

Though many personal finance books briefly explore the idea of paying yourself first, David Bach's 2003 best-seller, The Automatic Millionaire is devoted exclusively to the subject. The entire book is a step-by-step guide to developing the saving habit and making it automatic. If you'd like more ideas about how to make this work in your life, this is the place to look. Any good public library will have a copy. Finally, here's a recent Get Rich Slowly discussion about how much you should save for retirement.

Pay yourself first, my friends. It's a habit that you will never regret.

Get Rich Slowly Philosophy

This is the fourth of a fourteen-part series that explores my financial philosophy. These are the core tenets of Get Rich Slowly. Other parts include:

More about...Investing, Retirement

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Thomas Murphy
Thomas Murphy
11 years ago

One of the most important issues in your financial activity is putting money aside, perhaps small amounts every month. after some time, you will find that you were able to save a significant amount of money that can be used if ever you find yourself in a difficult financial situation, or if you want to buy something that youve always dreamed of.

Sam
Sam
11 years ago

I’m like you J.D., I wish I had developed the pay myself first habit earlier in life. I regret those years (between age 21 and 30) when I wasn’t doing much saving. But, I can attest that I’ve been paying myself first since age 30 (I’m 36) and its painless. The first bill I pay each month is to our savings account (401k savings is deducted before we even get our paychecks). I’m a big fan of the automated transfer too. My savings is automatically transferred from my Wachovia checking account to ING (I have auto transfers for other savings… Read more »

Frugal Dad
Frugal Dad
11 years ago

“Paying yourself first” almost sounds cliche in the world of personal financial advice, but is really the basis of any good financial plan. I used to play the game of “saving” whatever was left in my account at the end of the month, but only started to really accumulate savings when I moved it right off the top at the beginning of the month.

Hank Osborne
Hank Osborne
11 years ago

I would modify the advice just a bit with what some call the 10-10-80 philosophy. Give 10% to God, pay yourself 10%, and then learn to live on 80% of your income.

Save, You Fool!
Save, You Fool!
11 years ago

Great advice. I wrote the same post on the “10% method” around paying yourself first. I’ve been doing this for the last 8 years now and it is the best decision I ever made. It’s the way I built up my emergency fund, bought a car and saved for a downpayment on my house.

Shanel Yang
Shanel Yang
11 years ago

“You’re telling yourself that you are more important than the electric company or the landlord.”

I love that point! Thanks, J.D.

elisabeth
elisabeth
11 years ago

My fund transfers to savings and other special accounts (our joint house account, my “tiny business” account) are the only automatic deductions I make. I haven’t automated any of my bills partly because writing a check every month for the cell phone, cable, electric, etc provides a time to once again consider those bills and how much I’m spending on each — it gives them each a moment in the brain that wouldn’t necessarily happen while balancing my checkbook…. On a much smaller level, the “throw your change in a bottle” method is also a form of automatic and painless… Read more »

nbdean
nbdean
11 years ago

I really like the part about your wife saving more as her salary increased, so that she ‘sees’ a steady income. It’s really easy to let your spending habits expand with your salary, without an appreciable increase in happiness, convenience, or satisfaction. I’m finishing graduate school right now, and we’ll be taking a job with a substantial pay increase over my small grad student stipend. I’m hoping to keep our spending close to where we have it currently, so that we can save a lot of that extra salary. Having a good chunk of it automatically deducted is a good… Read more »

Bill Stevens
Bill Stevens
11 years ago

The hardest thing to do is get young people to do this. It’s so important, yet simple, yet difficult to do and it knows no intellectual boundaries. I know a 40 year-old Cardiologist who doesn’t know what to do with his money. I have two daughters in their twenties who went from no job ($0.00) to a job, both are making over $30,000.00 year straight out of college. One of them started saving monthly but has since stopped, the other has never saved and is heading down into the depths of debt. I always ask them, “What changed, that you… Read more »

Mark Nelson
Mark Nelson
11 years ago

Our society has such a “I want it now” thinking. If people can just develop the habit of paying themselves first they will be better off in the long run.

Beth@paydaytree
11 years ago

Actually, it’s thanks to David Bach’s book Smart Women Finish Rich that I have started saving. I put aside 12% of every paycheck I get into my savings account. I really don’t miss it at all and I LOVE watching my savings account continue to grow (and watching my interest payments keep getting larger). I agree that it seems like it would be hard to start doing … but I am so glad that I’m starting now.

Kevin@MoneyAisle
11 years ago

Another trick that worked for me early on, when I worked a job that paid overtime: I set anything I earned over a certain amount to be deposited into a high-yield savings account. Some weeks it would be just a little bit of my base pay, and on weeks when I wound up working a lot of extra hours, a larger amount got deposited. I was able to save a lot of money that way, without ever noticing the difference in my “spending” money. I know not all jobs have that option (my current job is salaried), but it’s something… Read more »

Ross Williams
Ross Williams
11 years ago

“Pay yourself first” is bad advice for young people. It places the accumulation of money and wealth as a central purpose in itself. In fact, earning and saving money is something that ought to serve our real goals in life. That means borrowing money to achieve those goals is also perfectly acceptable. The problem is not that people take on debt, but what they spend it on. Getting an educations, starting a business or buying a home are all positive reasons to take on debt for many people. And that short list is hardly exhaustive. Buying a guitar, bike or… Read more »

Jen
Jen
11 years ago

This sounds like great advice IF you don’t already have high-interest debt. If not, then by taking 10% off the top for savings instead, you are essentially incurring debt by inaction (through maintenance of high interest balances rather than eliminating them)… Unless your “savings” is really an investment with a _guaranteed_ payoff higher than the interest rate on your debt, then you’re just undercutting your ability to get out of debt sooner (and stay out)… hm? Conceptually (and mathematically), every bit of cash I sit on in savings is like having taken a long-term cash advance out of the credit… Read more »

Rich
Rich
11 years ago

@Ross,

Your advice reflects the poor money management skills and attitude that have led people deep into debt, including being in over their heads with the recent mortgage problems.

Yes, debt is necessary for certain things but the attitude of “I’ll make money later to cover these expenses” is just crazy!

Saving money isn’t about making money a central purpose in itself, it’s about being able to buy that guitar, bike or golf club without paying loan interest on it and about being able to handle unexpected turbulence in life.

Ron Lewis
Ron Lewis
11 years ago

I began paying myself a few months ago and I’m hooked. I’m also going to take advantage of the free bill pay service offered by my bank to address some lingering credit card and other debt.

Since my wife and I get paid on alternating weeks, we can send small weekly amounts to our creditors before we have a change to spend it. $12.50 is a small amount, but x 4 its $50 bucks a month and $600 bucks a year. These small amounts on low or no interest debt make sense to us in these trying economic times.

nbdean
nbdean
11 years ago

Ross, I have heard your argument before, mostly from economists who believe in having a constant ‘utility’ or happiness throughout your lifetime, even though your salary is not constant. All of these arguments seem to be ignoring the uncertainty of the future. Certainly if you know exactly how much you will earn and when, you could well be justified in borrowing against that future income to buy your golf clubs. While you can hedge against many kinds of uncertainties with insurance, there is still a good possibility that your future earnings (or needs) will not match up well with your… Read more »

Crinklynose
Crinklynose
11 years ago

Hi JD, Awesome advice as usual :o) Thanks a bunch! I got my husband and a few friends hooked up in your blog as well and they can’t thank me enough :o) Btw, since you’ve mentioned David Bach’s book, I wanna ask you what you think about his online money management tool- “Automatic Money Manager”. I’m still trying to play around it (they have a 30-day trial) and so far I’m liking it. I haven’t seen that much reviews about it so I thought maybe you’ve already tried it or some of your readers here might be able to share… Read more »

Zubin
Zubin
11 years ago

Thanks for posting this, it is an excellent reminder of this principle. I am doing it already (mostly thanks to this blog), but it reminded me to consider upping my monthly contribution to high-interest savings. I also sent it on to my younger sister.

Ross Williams
Ross Williams
11 years ago

“Your advice reflects the poor money management skills and attitude that have led people deep into debt” I don’t think so. They reflect an understanding that debt is a valuable tool that can be abused. Your advice reflects learning the wrong lesson from abusing credit – that it was using credit that was a poor choice, rather than how that credit was used. “including being in over their heads with the recent mortgage problems.” Nothing I said suggested that people should borrow more than they can afford. You article wasn’t about abusing credit, it was an argument for young people… Read more »

Russell Heimlich
Russell Heimlich
11 years ago

The Automatic Millionaire was what first turned me on to this idea and the power of compounding in general. I’m glad I took the time to read that book cover to cover.

Jeff Frese
Jeff Frese
11 years ago

I started a company that lets anybody in your circle of friends and family gift directly into your child’s 529 plan. So instead of another Barbie Doll or shirt from the Gap people can gift into your child’s plan. It’s a simple site and concept that helps people save for college and give meaningful gifts. The site is http://www.freshmanfund.com

Ross Williams
Ross Williams
11 years ago

@nbdean Particularly with some of the example you gave about guitars, golf clubs and the like I chose them because a lot of the “no credit” argument is really moralizing about how it is used and the values people have. Education and house are “important” while “guitar, bike or golf clubs” aren’t. But that is a values judgment. For instance, I borrowed money to buy a bike while driving a a series of junkers. Particularly with some of the example you gave about guitars, golf clubs and the like, why not just exercise a little self-discipline and wait a few… Read more »

Rich
Rich
11 years ago

I don’t think so. They reflect an understanding that debt is a valuable tool that can be abused. Your advice reflects learning the wrong lesson from abusing credit – that it was using credit that was a poor choice, rather than how that credit was used. Other than a reasonable car debt, I’ve never had a debt in my life. My attitude reflects being a recent college grad and seeing friends screw up their lives through the type of debt you’re suggesting. Nothing I said suggested that people should borrow more than they can afford. If you don’t have money… Read more »

Jason
Jason
11 years ago

@ Ross Williams ““Pay yourself first” is bad advice for young people. It places the accumulation of money and wealth as a central purpose in itself.” I don’t think JD considers it bad advice. Why is teaching young people to save a bad thing, exactly? I didn’t realize you could save but NOT spend any money on hobbies / recreational activities. If you save, there’s a significantly better chance you won’t HAVE to borrow and be in debt. Thus, you can have your cake and eat it too. Just my 2 cents. I’m from the Dave Ramsey school of thought-… Read more »

Rebecca
Rebecca
11 years ago

@ Ross Williams: “Buying a guitar, bike or golf clubs may be equally valid reasons for borrowing rather than delaying the benefits of owning those things.” You use examples of recreational activities as valid reasons to go into “managed” debt. Unfortunately, there’s no such thing as managed debt and risk-free borrowing. Fortunately, however, there are multiple free and inexpensive opportunities for recreation and personal gratification that don’t put future financial stability (and the concurrent stresses and LACK of recreation) at risk. Like guitar and music? Join a choir. Find free summer concerts. Or if the guitar is important, offer to… Read more »

Ross Williams
Ross Williams
11 years ago

If you don’t have money for something you can’t afford it. That’s the definition of can’t afford, which is exactly what you are suggesting. Credit is just something more to afford. The dealership and I both operated under the assumption and plan that over the long term (the 5 year term of the loan) I would make enough money to pay it back I doubt it. If the car dealer actually made the loan, they probably have already sold it. The only question for them was whether your credit would allow them to find a buyer. And the question for… Read more »

Aleks
Aleks
11 years ago

I would rate “pay yourself first” as the best financial advice after “spend less than you earn.” Obviously you need to pay off any high interest debt first, and you can’t be saving with one hand while running up credit card bills with the other. But once you get a handle on your spending, automating saving really kicks it into high gear. I’ve never been in debt but it wasn’t until I read The Wealthy Barber and started taking 20% off the top that I really built up any savings. Previously while I didn’t spend more than I earned, I… Read more »

Rebecca
Rebecca
11 years ago

“Actually, since consumer spending makes up a huge portion of the economy, its probably the only thing that has kept the economy afloat.” Frankly, it’s not my responsibility to keep the consumer economy afloat. The consumer economy won’t do anything to help pay for my wedding, put a kid through school, or afford a sensible retirement plan once I’ve stopped working. “I’ve known a few people who have been stunned to discover that having never bought anything on credit, they had no credit when they “needed” it.” That’s why I save for what I can afford, put it on the… Read more »

Rich
Rich
11 years ago

@Ross

I still think that spending money you don’t have is illogical and irresponsible.

I’ve known a few people who have been stunned to discover that having never bought anything on credit, they had no credit when they “needed” it.

I save money each month, keep out of debt and am building a solid credit history. If you treat your credit card like a debit card (spend only what you have) you’ll have credit when you need it.

Ross Williams
Ross Williams
11 years ago

If you treat your credit card like a debit card (spend only what you have) you’ll have credit when you need it. You are still borrowing money – albeit its a free, short term loan. I still think that spending money you don’t have is illogical and irresponsible. And I think you are wrong. As do most home owners and almost every business in the world. The way most people get rich is spending other people’s money. Previously while I didn’t spend more than I earned, I still spent almost all of what I earned Apparently on things you didn’t… Read more »

Ross Williams
Ross Williams
11 years ago

Rent golf clubs as a monthly treat to yourself while saving up for buying your own.

How is paying a monthly rental superior to making payments on your own clubs?

A guitar valued at $200 shouldn’t cost you $600 when accounting for interest.

At 15% annual interest a $200 guitar costs about $2.50 per month. It would take a long time to get to $600 at that rate.

It seems there is an effort by some people to make debt into a moral issue. It isn’t. Its just a business transaction.

Jan
Jan
11 years ago

As a middle aged adult I am learning how to save all over again. When growing up my dad taught me how to save but little else when it came to budgets and bills. So when I got married I had to learn all about living on a paycheck with rent and other bills. I had long since then forgotten how to save. Now I am slowly getting back into saving again.

Katrina R.
Katrina R.
11 years ago

J.D.:

What’s the perfect formula for saving and investing? Meaning, if 20% of your take home goes into your savings, then is another 5% invested in retirement accounts? Or within that 20%, is 12% of it dropped into a 401(k) and the remaining 8% into a savings?

How does everyone else configure this?

Charles
Charles
11 years ago

@ Ross Williams: The way most people get rich is spending other people’s money. You’re right – a lot of people do get rich by borrowing money for an investment. However, you’ve failed to cite the millions of people who borrow money on a daily basis with the same intention only to wind up deep in debt. You always hear success stories of the people who’ve profited from borrowed money, but very rarely do the losers speak up. If all of the less fortunate borrowers were to share their stories, I believe, without a doubt, that we’d find out that… Read more »

Charles
Charles
11 years ago

@ Katrina R:

I loosely follow “The 60% Solution” described by Richard Jenkins here:

http://articles.moneycentral.msn.com/SavingandDebt/LearnToBudget/ASimplerWayToSaveThe60Solution.aspx

You may find it is a good place to start. I say “loosely” because we’ve reduced our monthly expenses down to 25% of our income, so we’ve had to significantly increase the amount of money going towards savings; but for a few months, 60% was a good place to start.

Hope that helps!

Rob Madrid
Rob Madrid
11 years ago

My wife and I were feeling down about all the bills that were coming our way this summer (including holidays I should add) till I realized just a year ago the whole thing would have been financed with credit cards

Go Savings!

And bravo to the poster who mentioned 10-10-80 rule. I remember years and years ago Robert Schuller of Crystal Cathedral fame talking about how you should give 10% to God, 10% to savings and live on the rest, how I wish I had followed that advice!

nbdean
nbdean
11 years ago

Ross, “Security becomes increasingly important as you have more people depending on you and/or more to lose, but young people shouldn’t live their lives with security as their first priority.” Now who’s making the values judgment? At any rate, certainly some people do consider borrowing a moral issue or a values judgment. I believe morals and values survive and are passed from one generation to another in large part because they mostly work. Just because someone’s decision is tinged with moral concerns doesn’t mean that decision can’t be objectively logical and sound. I personally look on borrowing as a simple… Read more »

db
db
11 years ago

“Security becomes increasingly important as you have more people depending on you and/or more to lose, but young people shouldn’t live their lives with security as their first priority.” Young people — and all of us — should be living with a mind to the notion that we might need some money at some point in the future more than we need all of the money we have today. It’s fine to take guitar lessons and buy a guitar (as one example) with a portion of TODAY’s wealth. It’s not fine, if doing so sets you up for struggling due… Read more »

gousalya
gousalya
11 years ago

Another way I have started saving is by buying things ahead of time…when they are on sale. I buy towels, wash clothes, bed sheets etc and keep them. However this does take some skill and afterthought for you can end buying too much too and waste money. You need to know alitle of product branding and pricing. Apart from this you need to check stores frequently to know what their sales are and how you can save.

I think I have managed quite well for the past year.

plonkee
plonkee
11 years ago

It’s funny and unsurprising that you didn’t read the book that your dad suggested. If you’ve got any tips on becoming less stubborn, I’m all ears.

Sam
Sam
11 years ago

I agree with others that suggest that most people want to spend some of their savings for fun/happy expenditures (the golf clubs or the vacation). What we do is to (1) max out 401ks (2) a certain chunk to emergency account savings each month (3) and then we have various other savings goals. Our other savings goals include longer term goals like a nused car for me (which I count as a fun/necessity expense – I could just keep driving my current car) or a summer vacation for Mr. Sam and me (short term fun savings goal) or a new… Read more »

Ross Williams
Ross Williams
11 years ago

Young people – and all of us – should be living with a mind to the notion that we might need some money at some point in the future more than we need all of the money we have today. Which is one of the roles of credit. Borrowing is one way of maintaining a ready cash reserve. Paying off student loans or buying a new car for cash is foolish if the result is that you have no ready cash/credit reserves for real emergencies. It’s fine to take guitar lessons and buy a guitar (as one example) with a… Read more »

Richie
Richie
11 years ago

The way most people get rich is spending other people’s money.

Not by buying a $200 guitar on credit.

Rich
Rich
11 years ago

Its foolish to deny your kids a trip to Disney World so that you can take your grandkids.

And even more foolish to deny your kids a good education so you can take them to Disney World.

Aleks
Aleks
11 years ago

What’s the perfect formula for saving and investing? Meaning, if 20% of your take home goes into your savings, then is another 5% invested in retirement accounts?

I put 10% of my gross into retirement savings, 10% into non-retirement mutual funds, and whatever’s left over at the end of the month (plus bonuses, tax rebates etc) into my ING savings account, which works out to roughly another 10% over the year.

Kym
Kym
11 years ago

I like this advice. I have found it best to pay myself first *and* last. I allow myself a budgeted amount of discretionary spending (my savings is also part of my budget, I do the 100% budget thing). At the end of my month, whatever is left in the discretionary budget goes into savings. I call it my “drip savings” as it is anything leftover.

Andy
Andy
11 years ago

I love the idea of paying yourself first, but how can you possibly do that if you make less than you spend? After all of my recurring bills (mortgage, utilities, car payment, etc.), I break even. I still need to buy groceries, gas, and anything else that pops up. So, basically I go in to debt on how much groceries I buy and how much gas I put in to my car. How can I pay myself first? I will go in to debt even further each month doing that.

Ross Williams
Ross Williams
11 years ago

Not by buying a $200 guitar on credit. I suppose that depends on how good a musician they are doesn’t it? But you apparently have missed the point. Whether you use credit and pay it back or save it in the first place is irrelevant. The only issue is the cost of using credit and you don’t have the guitar while you are saving for it. And even more foolish to deny your kids a good education so you can take them to Disney World You mean if you use your savings to go to Disney World? Or if you… Read more »

Richie
Richie
11 years ago

I suppose that depends on how good a musician they are doesn’t it? But you apparently have missed the point. Whether you use credit and pay it back or save it in the first place is irrelevant. The only issue is the cost of using credit and you don’t have the guitar while you are saving for it. If you are a guitar player and purchasing a guitar on credit can lead to future income, then that is probably not a bad idea. But buying a hobby guitar on credit is not the definition of using other people’s money to… Read more »

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