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

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.

pay yourself first

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:

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There are 188 comments to "Pay yourself first: How you can overcome the challenge of saving".

  1. Thomas Murphy says 16 June 2008 at 01:28

    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.

  2. Sam says 16 June 2008 at 04:19

    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 goals too).

  3. Frugal Dad says 16 June 2008 at 05:41

    “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.

  4. Hank Osborne says 16 June 2008 at 06:00

    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.

  5. Save, You Fool! says 16 June 2008 at 06:42

    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.

  6. Shanel Yang says 16 June 2008 at 07:10

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

    I love that point! Thanks, J.D.

  7. elisabeth says 16 June 2008 at 07:18

    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 saving, it’s out of sight, out of mind, that money doesn’t get spent either.

  8. nbdean says 16 June 2008 at 07:22

    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 idea.

  9. Bill Stevens says 16 June 2008 at 07:32
    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 went from $0.00 to $30,000.00 and you can’t seem to save?”

    Now, I’m not naive and I know the answers, but it’s socially interesting that people have such a hard time doing this.

    I WAS included in that group some 30 years ago.

  10. Mark Nelson says 16 June 2008 at 07:42

    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.

  11. Beth@paydaytree says 16 June 2008 at 07:48

    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.

  12. Kevin@MoneyAisle says 16 June 2008 at 08:47

    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 to keep in mind if you have that avenue open to you.

  13. Ross Williams says 16 June 2008 at 09:09

    “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 golf clubs may be equally valid reasons for borrowing rather than delaying the benefits of owning those things.

    In general, people will have to wait until they are older to make most of their money. But that doesn’t mean they should also wait until they are older to spend that money.

  14. Jen says 16 June 2008 at 09:29

    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 cards just to deposit it in my bank account “in case”.

    So I suppose in this case, “pay myself first” means “get myself out of debt first”, before even considering using money on non-critical needs.

  15. Rich says 16 June 2008 at 09:42

    @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.

  16. Ron Lewis says 16 June 2008 at 09:43

    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.

  17. nbdean says 16 June 2008 at 10:02

    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 expectations. If you find yourself downsized out of a job, or your car breaks down on you, you may find that there are better uses for your money than golf clubs. Of course I guess you could borrow more and more money to pay for these unexpected expenses, but digging yourself out of that kind of hole is not fun and is wasteful (due to the interest payments).

    Unexpected rainy days are one of the primary reasons that I save money. Being able to retire and live comfortably off of those savings down the road is a bonus.

    Certainly there are valid reasons to borrow, and I would venture to say that most of the readers here have or have had a mortgage for their house. Borrowing for education, if you need to, is also a good idea, I think. If you are really strapped for cash, there may come a need when you have to borrow some money to buy a vehicle to take you to your place of employment. Beyond these, however, I would have a very difficult time justifying a loan. 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 months until you have the money to buy it outright? It’s the ‘borrow now for anything you feel like you want or need’ philosophy that you espouse that is the cause of all the consumer debt today.

  18. Crinklynose says 16 June 2008 at 10:04

    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 what they think about AMM.

    Thanks again and more power to you!

  19. Zubin says 16 June 2008 at 10:07

    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.

  20. Ross Williams says 16 June 2008 at 10:13

    “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 to save money rather than spending it on things to make their lives better.

    “Saving money isn’t about making money a central purpose in itself”

    Its not? Some people seem to disagree:

    “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”

    If you “LOVE” watching your savings account grow, how do you ever spend it? And I might point out Smart Women Finish Dead, just like the rest of us.

    s about being able to buy that guitar, bike or golf club without paying loan interest on it

    There are a lot of people who pass up the opportunities life presents with plans for retirement. Unfortunately many people aren’t able to learn to play the guitar, ride a bike or golf by the time they retire.

  21. Russell Heimlich says 16 June 2008 at 10:27

    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.

  22. Jeff Frese says 16 June 2008 at 10:39

    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

  23. Ross Williams says 16 June 2008 at 10:46

    @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 months until you have the money to buy it outright?

    What does “self-discipline” have to do with it. Buying it on credit is a financial decision – is it worth the extra cost in interest? Its no different than buying a more expensive version.

    It’s the ‘borrow now for anything you feel like you want or need’ philosophy that you espouse that is the cause of all the consumer debt today.

    No, the cause of consumer debt is that credit card companies stopped paying any attention to making sure people could afford the payments before they issued credit. But that is their problem.

    People usually get in over their heads because they don’t make good decisions about how they spend money and that includes accumulating more debt than they can afford.

    Unexpected rainy days are one of the primary reasons that I save money.

    That is certainly a reason to make sure you have financial resources available, including lines of credit. But, at its most extreme, that’s what bankruptcy courts were created to handle and those credit card companies are the losers.

    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.

  24. Rich says 16 June 2008 at 11:05

    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 for something you can’t afford it. That’s the definition of can’t afford, which is exactly what you are suggesting.

    Eg. The car I bought which I took a loan out for:
    We took out a loan because I didn’t have enough money for it. 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, but that’s not a guarantee.

  25. Jason says 16 June 2008 at 11:06

    @ 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- avoid debt whenever possible. I agree w/ Rich- if you can’t afford it, then either you save for it or don’t buy it. Not enough people saving and too many people spending what they don’t have one reason why America is in poor financial shape.

  26. Rebecca says 16 June 2008 at 11:29

    @ 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 volunteer at a music store or with a local teacher and bank/barter your time to save up and purchase a guitar (a friend’s doing this now with the fiddle. It can definitely be done). Rent golf clubs as a monthly treat to yourself while saving up for buying your own. Reach out to your network and see if friends have clubs that are underutilized. Spend your Saturdays caddying at the club and see what you can gain.

    Be creative, develop a fulfilling recreational life at minimal price, and manage to secure your future as well. This isn’t an either/or proposition.

  27. Ross Williams says 16 June 2008 at 11:31

    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 you was whether you could “afford” the payment and was the car worth the cost, including the interest. And that is all credit is, another part of the cost of buying something.

    Not enough people saving and too many people spending what they don’t have one reason why America is in poor financial shape.

    Actually, since consumer spending makes up a huge portion of the economy, its probably the only thing that has kept the economy afloat.

    My attitude reflects being a recent college grad and seeing friends screw up their lives through the type of debt you’re suggesting.

    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.

    You may be surprised in a couple years when those college friends who were in so much trouble have found good paying jobs, paid off their credit cards and bought a house and new car on credit. They will probably be paying off their student loans and taking the deduction off their taxes. In short, they will be making responsible use of credit.

  28. Aleks says 16 June 2008 at 11:41

    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 still spent almost all of what I earned. In two years of paying myself first I’ve saved twice as much as I did in the previous 31 years.

  29. Rebecca says 16 June 2008 at 11:51

    “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 card, and pay it off in full, every month. The card is a tool to build a credit history, not unnecessary debt. A guitar valued at $200 shouldn’t cost you $600 when accounting for interest. Maybe it is $600 worth of fun, but you could have saved, bought a $600 face value instrument, and had real resale opportunity instead.

  30. Rich says 16 June 2008 at 12:00

    @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.

  31. Ross Williams says 16 June 2008 at 12:06

    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 really value. That, not that you didn’t save the money, was the mistake.

  32. Ross Williams says 16 June 2008 at 12:23

    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.

  33. Jan says 16 June 2008 at 12:38

    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.

  34. Katrina R. says 16 June 2008 at 12:44

    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?

  35. Charles says 16 June 2008 at 12:47

    @ 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 a majority of people who borrow money for investment purposes fail to succeed and are stuck with the debt.

    So JD has made an excellent point about trying to avoid spending money you don’t have. Statistically speaking, it’s the safest way to build wealth – hence the “Get Rich Slowly” philosophy.

  36. Charles says 16 June 2008 at 12:53

    @ 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!

  37. Rob Madrid says 16 June 2008 at 13:12

    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!

  38. nbdean says 16 June 2008 at 13:40

    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 financial decision, as do you. The cause for our different conclusions, however, is that when you ask “Is it worth the extra cost in interest?”, claiming that’s it no different from purchasing a more expensive version, I ask “Is it worth the extra cost in interest, and the risk that my financial situation may change while I’m trying to pay it off?”. The amount of interest one must pay on an item is not fixed, it is random, depending on interest rates and your ability to make payments. As such, the comparison to a more expensive version is not an effective one.

    When you dismiss bankruptcy concerns as the credit card company’s problem, then you really are treading on moral ground. You also are discounting the very real negative effects that happen to the person who declares bankruptcy, including the loss of all those lines of credit.

    Also, I chose education and houses as examples not because of their “importance” as compared to guitars and golf clubs. As for houses, renting something, such as shelter, on a permanent basis is an even poorer financial decision than buying on credit. This is particularly true when that something does not depreciate in value easily, and generally appreciates in value. As for education, this is also a great financial decision if your chosen career requires a degree that you don’t yet have. Borrowing for education puts you in a safer position in terms of future risks, not a more precarious one. Unless you are a guitar teacher or a professional golf player, your examples are exempt from such considerations. So you see, my examples are not values judgments at all, but financial ones. Your examples are the ones to reflect values judgments.

  39. db says 16 June 2008 at 14:00

    “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 to lack of resources in the future.

    That is why the notion of saving 10% is such a good one. It acknowledges that tomorrow you might need some of what you have today. It still gives you 90% of your money to spend however you need to and want to TODAY.

    Save your 10%. Pay your bills. Then buy your guitar or what have you. If you HAVE to take out debt, make sure it’s for a smart reason (like education or a house) and not for a dumb reason (wanting a guitar before you can pay for it out of today’s money.)

  40. gousalya says 16 June 2008 at 14:02

    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.

  41. plonkee says 16 June 2008 at 14:04

    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.

  42. Sam says 16 June 2008 at 14:20

    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 couch (again the old couch is just fine but I want a new one, so I count this as fun).

    So Mr. Sam and I will take a summer vacation in August and we will have lots of fun and will spend a fair chunk of money but we won’t use our credit cards. Instead we put aside vacation money each month and once we have a vacation scheduled we create a rough budget and put aside more money each month to cover the budget. I posted about my Memorial Day trip on a budget on my blog if anyone is interested (not that its rocket science).

  43. Ross Williams says 16 June 2008 at 14:34

    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 portion of TODAY’s wealth. It’s not fine, if doing so sets you up for struggling due to lack of resources in the future.

    That isn’t really the question since the chances are pretty good for most young people that they will have more resources in the future, not fewer. Its foolish to deny your kids a trip to Disney World so that you can take your grandkids.

    No one is arguing that people should overextend themselves on credit and end up struggling financially. They should responsibly use their capacity to borrow to make their lives better. And responsibly means staying within your financial ability to make payments.

  44. Richie says 16 June 2008 at 15:35

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

    Not by buying a $200 guitar on credit.

  45. Rich says 16 June 2008 at 15:37

    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.

  46. Aleks says 16 June 2008 at 15:50

    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.

  47. Kym says 16 June 2008 at 15:53

    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.

  48. Andy says 16 June 2008 at 15:55

    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.

  49. Ross Williams says 16 June 2008 at 16:04

    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 refuse to take on debt for their education?

    Again the issue is spending money wisely, not whether it is borrowed or saved. You can argue Disney World isn’t all that important but that is a question of values. My point was that not spending money now so that you will have it to spend in the future makes no sense unless you think you will have better things to spend it on in the future than you do today.

  50. Richie says 16 June 2008 at 17:01

    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 get rich.

    I think that using credit or loans to acquire necessities is using credit responsibly. (education, homes, cars, auto insurance, business expenses, car repairs, etc.) But it’s only responsible if you can pay back that loan in a reasonable amount of time. Using credit for daily expenses and frivolities can only be done responsibly if you have a plan to pay that loan back quickly (hopefully within a month).

    If you are buying comic books on credit and not paying those expenses off at the end of the month, then it’s not being responsible.

    And by responsible, I mean being responsible to yourself. I also think it’s irresponsible to expect to die of old age with debts exceeding assets.

    Businesses may be able to borrow their way to prosperity, but people can’t.

  51. Reggie, Another kid with Good Credit says 16 June 2008 at 17:58

    Investing in an IRA – now that’s an idea. I might have to start doing that soon because, I’m thinking I might get pounded on my 401k if I end up SEVERAL tax brackets higher by the time I’m 60 – which I’m hoping will be the case. Might as well pay in the lower tax bracket today.

  52. Ross Williams says 16 June 2008 at 18:37

    But buying a hobby guitar on credit is not the definition of using other people’s money to get rich.

    Nobody said it was. That doesn’t make it an irresponsible use of credit. The guitar may have more value to some people than getting rich.

    Using credit for daily expenses and frivolities can only be done responsibly if you have a plan to pay that loan back quickly (hopefully within a month).

    Why? I don’t think the question is how you pay for it, but whether it is worth the money given your resources. If you are running up big bar tabs every weekend, its probably a poor use of resources whether you pay cash or use credit.

    I also think it’s irresponsible to expect to die of old age with debts exceeding assets.

    Irresponsible to who? Certainly not your dead self. And, presumably, the business people who loaned you money factored that possibility into the price of your credit. I guarantee they don’t feel any “responsibility” to you beyond their legal obligations. Why should you feel responsible to them?

    If you are talking about loans from friends and family I would agree with you. Those aren’t purely business deals.

  53. Kevin Chester Kuo says 16 June 2008 at 19:40

    Hey J.D.,

    Great website. I’ve been following your posts for a few weeks now and I love your insight mixed with personal anecdotes and things you’ve read. I’m a recent college graduate and I fortunately developed the habit of paying myself early on. That combined with my exceptional frugality allowed me to graduate with approximately $10,000 in savings. Here’s my
    post on it

    When I first started college I didn’t realize the crippling effect of finance charges. By then I was already $2000 in debt. Since my parents refused to help me, I had no choice but to get two jobs during the school year and work like crazy to pay it off.

    It was a hard lesson to learn, but I’m glad I learned it early! I just wish that more young people would take the time out to educate themselves about personal finance.

    I think borrowing other people’s money aka leveraging, can be extremely effective in building wealth. However, it’s risky and should only be done with considerable due diligence and consideration.

    Generally, if you’re going to use borrowed money to make money, you best make sure you have a means of paying it back if plan A doesn’t pan out.

  54. nbdean says 16 June 2008 at 19:41

    “And, presumably, the business people who loaned you money factored that possibility into the price of your credit.”

    Presumably, the local retail store factors the possibility of shoplifting into their prices.

    Presumably, the banks factor the possibility of fraud into their interest rates.

    Presumably, the auto insurers factor the possibility of theft and vandalism into their premiums.

    Nor do the retail store, bank, or auto insurer feel any “responsibility” to you, so I guess it’s OK to steal, defraud, and vandalize.

    What about the chance of getting caught you say? Alright, well then how about the waiter at the restaurant? He factors the possibility of patrons who do not tip into his decision to wait tables. He feels no “responsibility” to you, and he works in a restaurant in a town that you will never visit again. So of course you leave no tip. Is this your personal philosophy, Ross? Is this your sense of responsibility?

    These are empty arguments for all but a selfish few. Ross, I understand you’re having a good time trying to stir up the readers of this blog, but please at least use arguments that make sense. Your suggestions in general seem to be predicated upon a certain philosophy that not many people share with you.

    If people cannot agree upon the axioms or initial assumptions in an argument, then there can be no persuasion, or even constructive discussion. Of course, if the object of your initial post was not to persuade, but rather to be inflammatory, then I suppose you don’t need to be a stickler about the validity of your points.

  55. Joel says 16 June 2008 at 19:46

    “Why? I don’t think the question is how you pay for it, but whether it is worth the money given your resources. If you are running up big bar tabs every weekend, its probably a poor use of resources whether you pay cash or use credit.”

    Well, here you’ve finally contradicted yourself and made a moral judgment. Apparently you’re OK with spending money you don’t have on a guitar that will bring you happiness, but if getting drunk is your thing it’s not such a good idea?

    “I also think it’s irresponsible to expect to die of old age with debts exceeding assets.

    Irresponsible to who? Certainly not your dead self. And, presumably, the business people who loaned you money factored that possibility into the price of your credit. I guarantee they don’t feel any “responsibility” to you beyond their legal obligations. Why should you feel responsible to them?

    If you are talking about loans from friends and family I would agree with you. Those aren’t purely business deals.”

    You just don’t get it do you? The business has already fulfilled their responsibility to you when they provided the item or the money(loan) to buy the item. Your “responsibility” not only legally but morally is to PAY THEM BACK!!!

  56. No Debt Plan says 16 June 2008 at 19:57

    I think if you don’t understand money you should definitely force yourself to pay yourself first. However, we pay ourselves last… but that is because our budget is setup so where we have significant cash flow at the end of every month. It gives us the flexibility we need during the month in specific categories (gas if we go on a trip, eating out if we have an extra church event, etc.) without having to worry about breaking the budget.

    But if you lack discipline, yes, pay yourself first.

  57. Ross Williams says 16 June 2008 at 20:49

    Apparently you’re OK with spending money you don’t have on a guitar that will bring you happiness, but if getting drunk is your thing it’s not such a good idea?

    That’s right. I don’t think getting drunk every weekend is a good use of money. My bad.

    Well, here you’ve finally contradicted yourself and made a moral judgment.?

    I have no problem making moral judgments if you are clear that is what they are. If you want to say people shouldn’t waste money, I would agree with you. But that was my point, credit or cash wasting money is a bad idea.

    I guess it’s OK to steal, defraud, and vandalize.

    All of those are illegal. But there is no legal obligation to pay off debts before you die. And there is no moral obligation either. If the lender wants assurance of getting paid, they should take out insurance. That is what it is for.

    You just don’t get it do you?

    Oh, I get it.

    Part of the current fad for creating the notion that there is some further moral responsibility for commercially obtained debt is the fear that customers will start treating the transaction as a business deal, the same way the business does.

    I think you don’t get it. The business entered into a contract where they expect to make money. It was a business transaction. You have legal responsibilities as a result. You have no moral responsibility beyond that any more than the business does.

    How many of Enron’s stockholders, the owners, have come forward to pay off its debts? None. Because their liability is limited by law to their investment. Anyone think they have moral responsibility to assume liability beyond that? I think you can make a better case for that than for the poor smuck who is under water on his house has an obligation to go down with the ship instead of handing the keys to the investors who bought his loan.

    Can you imagine the reaction if the folks who bought the sub-prime mortgages expecting to make a killing now demanded that the banks and other loan originators fulfill their “moral obligation” to make good on the ones that went bad? They wouldn’t get past the laugh test.

    He factors the possibility of patrons who do not tip into his decision to wait tables.

    I doubt it. He serves food with the assumption people will leave a tip if he performs his service satisfactorily. That is part of the deal. Its a social obligation like leaving money in the collection plate on Sunday. You don’t tip at McDonalds, its not part of the deal.

    These are not business contracts. I think the argument that you should feel a similar social obligation to faceless investors who bought your credit is plain silly.

  58. nbdean says 16 June 2008 at 21:48

    “He serves food with the assumption people will leave a tip if he performs his service satisfactorily.”

    In fact, he serves food with this assumption only about most people. Anybody with the slightest experience in the restaurant business knows that there are people who will stiff the server on their tip even if the service is performed satisfactorily.

    “If the lender wants assurance of getting paid, they should take out insurance. That is what it is for.”

    Insurance is not magic. Just because you are insured from the event, doesn’t mean you don’t pay for it. You just pay for it in small increments, over a long period of time in a method of payment called ‘insurance premium’, which is tied exactly to the rate at which said adverse event occurs. Insurance does not remove expected cost, it only removes the related uncertainty of it.

    “I think the argument that you should feel a similar social obligation to faceless investors who bought your credit is plain silly.”

    Many of these ‘faceless’ investors, are people like you and me who have bought into stocks and mutual funds, and it is precisely these same ‘faceless’ investors, trying to save for retirement, that you are stiffing when you shirk your obligation to pay your debts. Just because you can’t see their faces as they bring you drink refills, doesn’t mean they’re not real people.

    The idea that you can do what ever you want to ‘businesses’ because they are not people is absurd. When you harm a business, you harm the investors, employees, and customers through your actions. The harm is spread out to the degree where perhaps nobody notices the effect individually, but the cumulative effects are not trivial.

    Really the only difference between the waiter and the investor is the faceless aspect that you mention, the investor’s facelessness being multiplied further by the diffusion of your actions over a large number of people. It is definitely easier to stiff the investors without feeling as much guilt, since you don’t have faces to connect with the people you injure.

  59. db says 16 June 2008 at 22:46

    Ross:

    I think perhaps you should meditate on the mission and purpose of this blog.

  60. Paul says 17 June 2008 at 00:09

    I’ve personally read “The Richest Man in Babylon” and I think what the author wrote is fairly common sense. Hard to put in to practice, but it pays dividends when it becomes a habit.

    Unfortunately, there tends to be more month left over than paycheck remaining, but by placing a certain percentage or dollar amount aside, one will always have money for those surprise bills.

    I tried for years to save after my bills were paid, but that never seemed to work. However, once I started putting a couple hundred away before my bills were paid, I’ve started to build a little nestegg.

    I think the importance of paying yourself first, is that it helps establish a good habit which will be needed once the high-interest loans are paid off. This will help fill the void of no payment. After all, as Ben Franklin ,I believe, said : A penny save is a penny earned.

    Good luck for the folks who are embarking on this lifestyle! It’s hard at first, but like many things it becomes easier once the habit is engrained.

  61. rk says 17 June 2008 at 07:22

    I agree with Ross and the need to pay yourself first. Its hard to see how personal finance is different from a real business. Since the objective of a business is to make money in the long term.

    To make money you need money. Since money is not in the mattress in the bedroom, therefore it has to be borrowed.

    Borrowing money to invest(in education, a new house, a business venture) is the key to economic progress.

    However, in my opinion, people need to start behaving like businesses and do more “due diligence” before committing to an investment. They need to ask themselves, does this purchase actually pay for itself in the long run? How will it improve the quality of my life, will I be able to make more money off it? Of course food and electricity will also qualify(since food is needed to stay alive, work and make more money).
    That way if a person invests in education, then the payoff 5 years down the line would be substantially more. Or he could invest in a guitar and stave off loneliness or reduce stress. Now that would reduce the chances of suicide (or improve her chances of social interaction and therefore make her more likely to save money on depression medication). There is a whole branch of accounting that deals with putting a dollar value on such things.

    However any real business would not take on credit card debt for the simple reason that the interest rate is astronomical.
    Credit card debt has a very high interest rate. No business on the planet would raise money at that rate for any duration more then 2 months.
    But most business would jump at a interest free loan of substantial amounts for a fixed amount of time. So sensible borrowing is the basis of economic growth.

    If a car or a set of golf accessories enables you to increase your earning potential then its a good investment. However you need to run the numbers before saying its a good investment.

    But then again, since most people don’t have the time to run the numbers, it makes more sense to avoid credit card debt and any sort of short term consumer debt that is substantially impacts your ability to stay afloat(financially) in times of health emergencies or other crisis(unless you have already planned for it, estimated the cost and invested the “crisis” money in a liquid instrument at a rate of interest that keeps up with inflation).

    However people are not businesses. They are creatures of impulse and emotion. So its easier to avoid impulse purchases if the “disposable” income(or liquid profits) is just not there(since its already invested somewhere)

    There, now it is out of my system. I feel happy…hmmmm….writing comments makes me happy. Maybe I need to get out more.

  62. Ross Williams says 17 June 2008 at 09:05

    The idea that you can do what ever you want to ‘businesses’ because they are not people is absurd.

    Yes it is, but that is your idea, not mine. You really don’t get it.

    Many of these ‘faceless’ investors, are people like you and me who have bought into stocks and mutual funds

    They bought very risky investments where the borrower paid a stiff premium in higher interest to offset that risk. That was a business decision and they sure aren’t going to return money to the borrowers if the investment turns out to have been less risky than they anticipated with fewer defaults. In essence the borrower paid extra as insurance against the possibility of default.

    No business on the planet would raise money at that rate for any duration more then 2 months.

    That depends on what return they could get from the money and whether they had alternatives available at a lower rate. There are plenty of small businesses that rely on their owner’s credit card. It is expensive, but they don’t have any other source of immediate credit.

    It is the same for anyone. Using credit is more expensive than using cash, it makes whatever you buy more expensive. And that needs to be figured into the decision of whether to buy on credit. If you can’t or don’t do that you aren’t using it responsibly. But there is no intrinsic moral superiority to using cash. Its just a purchasing decision, like whether to buy the more expensive brand of toilet paper.

  63. Ross Williams says 17 June 2008 at 09:20

    However people are not businesses. They are creatures of impulse and emotion. So its easier to avoid impulse purchases if the “disposable” income(or liquid profits) is just not there(since its already invested somewhere)

    I agree and if you can’t control your impulses or emotions then you will find yourself spending money foolishly. My wife and I have taken to riding our bikes to garage sales with $5 and no check book. If we really want something that won’t fit into the bike bag then we have to go back and get the car.

    That also works for grocery shopping whether biking or walking. Its amazing how focused you can be when you are limited to one shopping bag full of groceries. You have to control your impulses. Once you are very conscious of each purchase, it seems to carry over even to the small items where space isn’t really an issue.

    What you buy is a whole lot more important than how you pay for it.

  64. nbdean says 17 June 2008 at 09:38

    “You really don’t get it.”

    Oh, I get it.

    I believe that I understand what you are trying to say, I simply don’t agree with it. In part this is because of a difference in starting principles, specifically some rather fundamental ethical ideas about being honest and fulfilling obligations made.

    Even if we were starting on the same page, I still don’t know that I’d be able to follow your logic to the same conclusion, because of the seeming fallacies and inconsistencies in your reasoning. I cannot say this with certainty, however, as I do not know precisely what all the fundamental assumptions would be.

    As the primary cause of your disagreement with almost all of the other commenters, myself included, seems to stem from a difference in first principles, I think we must simply agree to disagree.

    If you are looking for places to promote your ideas about the liberal use of consumer credit, I would venture to say that this blog is probably not the most receptive or appropriate venue.

  65. Ross Williams says 17 June 2008 at 10:31

    Oh, I get it.

    Then why did you say this? “The idea that you can do what ever you want to ‘businesses’ because they are not people is absurd.” Or was that just a dishonest attempt to deceive other people about what I said?

    specifically some rather fundamental ethical ideas about being honest and fulfilling obligations made.

    I think you are being fundamentally dishonest. You want people to continue make decisions about how they handle their money emotionally. You want to convince them that they are bad people if they find themselves in circumstances where they can’t repay the debts they took on in good faith. That people who bought those loans hoping to “get rich quick” are victims because their gamble didn’t pay off. That they didn’t understand that they were buying a share in the risk you took when you borrowed the money and hoped to make a handsome profit from it.

    I would venture to say that this blog is probably not the most receptive or appropriate venue.

    The key to “getting rich slowly” is to stop treating how people handle money as moral or emotional decisions and start treating them as business decisions.

    Credit or cash are morally neutral. The choice of which to use is practical, not moral or ethical. Credit is more expensive than cash. It is in limited supply, just like cash. You can waste either one on things you don’t value or you can choose to spend them on things you do value. Its the decisions about what you buy, not how you pay for it, that is important.

    It is fundamentally dishonest and unethical to portray that as advocating the “liberal use of consumer credit”. But then, we obviously have some different ideas about those values.

  66. db says 17 June 2008 at 10:49

    Ross:

    *I* am not a business. I am a person. I am not conducting my personal affairs as if I were a business. I do not see the reason for converting my way of thinking to see myself differently.

    Do not attempt to render me an emotionless, “logical” entity. It isn’t going to happen. We are not corporations. We are people.

    What is your problem with this whole concept anyway? What is it you find so objectionable about the very simple concept of saving a portion of your money every month? Why is embracing that idea so vilely based in emotion that you have to keep hammering at people in this blog?

  67. Ross Williams says 17 June 2008 at 11:17

    Do not attempt to render me an emotionless, “logical” entity. It isn’t going to happen. We are not corporations. We are people.

    That’s fine. Just understand that if you make your money decisions based on emotion they are often going to be bad financial and business decisions. Corporations are run by people too.

    What is it you find so objectionable about the very simple concept of saving a portion of your money every month?

    I didn’t object to that entirely. What I said was ‘“Pay yourself first” is bad advice for young people.’

    Young people starting out should be far more concerned with making sure they spend money on things that will help establish them in life, than accumulating a bank account. And since their earning power is likely to increase, they ought to make responsible use of credit to accomplish those things. That devolved into a discussion of the appropriate use of credit.

    That does not mean “pay yourself first” is always a bad concept if you know what you are saving money for and have extra money. But if you have consumer debt and can afford to “pay yourself first” then you should use the money to pay off the high-interest debt first, not put it in a lower interest savings account. And, in general if you are young, you ought to leverage your limited finances by borrowing for a purchase and using the money you would have saved to pay off the loan rather than saving for a later purchase.

  68. nbdean says 17 June 2008 at 11:40

    Ross, I have made no attempt to deceive people about what you said. The entire thread of conversation is contained right here on this comments section, and anyone reading it can very easily see for themselves exactly what you said, and make their own judgments about whether my responses are fair.

    At any rate, your accusation of my alleged unfair representation is immediately followed by a string of your characterizations of my position which are at least as exaggerated and baseless as you claim my characterization is of yours.

    You have said that you have a social obligation to tip a waiter or leave money in a collection plate, but that you have no such obligation when a business is involved, and you back that up with a statement about faceless investors. In my mind, this says that your system of ethics treats businesses differently because they are not people, or because a business contract is involved instead of an unwritten understanding between one person and another.

    When I say that we have a fundamental disconnect on ethical issues, I am not accusing you of being unethical or dishonest, and I don’t appreciate your own accusations towards me in that vein. I’m not in the business of telling people they are bad or imposing my own morals or ethics on others. I am only saying that when people’s ethical systems do not agree, as ours clearly do not on the issue of leaving debt unpaid at death, then further discussion that depends fundamentally on the ethical issue in dispute is relatively fruitless.

    Finally, the word liberal is entirely subjective and contextual. In the context of this blog and the readers thereof, your position on the use of consumer credit falls well within the range of the term liberal, and I stand by that comment.

    I am sorry that you seem to be taking this personally and on an emotional level. If you thought, however, that your ideas would not come under criticism on this blog, then you perhaps need to familiarize yourself a bit better on what this blog is about.

  69. Ross Williams says 17 June 2008 at 12:16

    I have made no attempt to deceive people about what you said.

    Well, yes you have and you are doing it again here:

    “You have said that you have a social obligation to tip a waiter or leave money in a collection plate, but that you have no such obligation when a business is involved”

    In fact, I made no such statement. Even if I had, how does it lead to this conclusion:

    ““The idea that you can do what ever you want to ‘businesses’ because they are not people is absurd.””

    our ideas would not come under criticism

    Actually you haven’t addressed my ideas, you have simply misrepresented them repeatedly. Instead of addressing the specific examples I provided you just repeat your belief that it is unethical to leave unpaid debts at death.

    You are right, I can’t argue with your belief. But I think you should state clearly “I think individuals have a moral obligation to repay debt owed to corporate stockholders, but the corporate stockholders have no moral obligation to pay off their debts beyond their investment in the corporation.” Or assert they do.

    Frankly, I think either proposition is preposterous. These are business relationships governed by law, not ethical discussions. You both signed a contract that spelled out exactly what your obligations to one another were under the applicable laws. You want to put the additional burden on the borrower of some unstated moral obligation.

    And the reason that is problematic ought to be obvious. There are all sorts of “credit counselors” out there that are in business to “help” people in financial trouble. And some of them use this very same argument about moral obligations to persuade unwitting people to buy their “services” instead of asking their creditors to forgive some of their debt or avail themselves of the perfectly legal remedy of bankruptcy.

  70. nbdean says 17 June 2008 at 12:42

    Here’s my clear statement:
    ——
    I believe I have a moral obligation to repay debt that I owe to anyone or any organization, regardless of their status as individual or corporation.

    I believe I could do very little to change anything about the structure of limited liability corporation even if I wanted to, so I have not invested the time and research into the subject requisite to form a well informed opinion on the subject.

    I believe the existence of limited liability corporations has no effect on my own moral obligation to repay debt that I assume.
    ——
    I don’t think borrowing is a moral issue at all. For me, however, defaulting on a loan is. You clearly take a different view. I am afraid to say more, lest you accuse me of misrepresenting you yet again. For anyone that has read any of my posts that reference Ross, please read Ross’ original posts as well, so that you may obtain an accurate representation on the matter.

  71. Joel says 17 June 2008 at 12:53

    “You are right, I can’t argue with your belief. But I think you should state clearly “I think individuals have a moral obligation to repay debt owed to corporate stockholders, but the corporate stockholders have no moral obligation to pay off their debts beyond their investment in the corporation.” Or assert they do.

    Frankly, I think either proposition is preposterous. These are business relationships governed by law, not ethical discussions.”

    Which law is it exactly that you have read that states that your death will relieve your obligation to pay your debts? Granted YOU won’t be here to actually pay them, but your estate is still responsible, at least up to the point that your estate has assets.

    The moral obligation some of us keep referring to is the promise that a person makes when they borrow money. When you take out a loan, you are promising to abide by the terms of the contract and repay the loan.

    You borrowed the money that you didn’t have to buy something you wanted (maybe needed, but to go back to the beginning I don’t believe that anyone NEEDS a guitar). I can’t understand how you are logically getting to the conclusion that it’s OK not to pay this back, dead or alive? They kept their end of the deal, you need to do the same.

    What you are ignoring here is the variable of risk. You are encouraging young people to go into debt, based on the ASSUMPTION that they will have more money in the future to pay it off. While most of the time income increases as we get older, you never know what is going to happen. What if they become injured or disabled and are unable to work? They still have the debt. I guess in your world it OK to just keep the stuff you bought and not pay what you owe. The business can just raise prices and the rest of us can pay for it.

  72. db says 17 June 2008 at 13:08

    This entire discussion is way off the rails.

    The post was about individuals saving a portion of their income on a regular basis as a matter of personal finance.

    “Just understand that if you make your money decisions based on emotion they are often going to be bad financial and business decisions. Corporations are run by people too.”

    DO NOT tell me what to understand. You have no authority to try and educate me. You do not know the extent to which I make decisions based on emotion (and furthermore you oddly seem to equate emotionless decisionmaking with business decisions.) You also are not nearly as successful in walling off your emotions from your decisionmaking as you think you are.

    I do not know why you keep dragging corporations into this. Corporations have a vast complex of legal obligations to fulfill. Personal finance is usually much simpler, unless you are rich or have complex investments.

    “Young people starting out should be far more concerned with making sure they spend money on things that will help establish them in life, than accumulating a bank account….blahblahblah..”

    Your basic assertion that in the face of a huge debt load it makes more sense to pay debt than emphasize savings is a sound one. I still think it’s wise for that person to save even a small bit for emergencies (Dave Ramsey, et al. advocates having a $1K emergency fund in place before attempting serious debt repayment. I’d like to see somebody try to save even $10/month if they are broke and struggling.

    I didn’t when I was young and swimming in debt. I regret it.

    Not everybody reading this blog is a young person, starting out, with more bills than money at the end of the month. Some of us are older, with a substantial cash flow, and it’s not so true for us that we have a huge expectation of great leaps in personal earning power ahead. We still need to save and pay down debt.

  73. Ross Williams says 17 June 2008 at 14:14

    DO NOT tell me what to understand.

    Don’t tell me what to say. You have no authority to do so. You are free to ignore that particular piece of advice – at your peril.

    I do not know why you keep dragging corporations into this.

    No one has to “drag” them into it. That is who holds most of the debt people owe, unless they have sold it off to individual investors.

    Not everybody reading this blog is a young person

    Just to be clear, my original statement didn’t address them. It was a specific statement about who that advice does not apply to.

    I guess in your world it OK to just keep the stuff you bought and not pay what you owe

    In the world I live in, we have bankruptcy laws that can legally forgive your debts so you no longer “owe” anyone anything. In the world I live in, the owners of corporations are not responsible for paying off its debts to you. In the world I (and you) live in, I pay a rate of interest that includes the assessed risk that I will be unable to pay off the loan. In the world I live in, my obligations are spelled out in a contract and subject to applicable laws.

    You are encouraging young people to go into debt, based on the ASSUMPTION that they will have more money in the future to pay it off.

    Yes I am. And you are encouraging them to forgo investment in making the best lives for themselves possible on the ASSUMPTION that they won’t be able to pay it off. If I am wrong, at worst they go bankrupt. If you are wrong they waste their life by failing to invest in it. All choices have risk.

    I think not going to college because you don’t want to borrow money is a poor choice even if the loans end up being a drag on your finances for the next 20 years. There are plenty of other ways young people can use money that are equally valuable.

    I don’t believe that anyone NEEDS a guitar

    Neither do I. But it can enrich someones life and it may well be worth paying $2.50 a month in interest to have one.

    They kept their end of the deal, you need to do the same.

    Your end of the deal is spelled out in the contract and by law, as is theirs. I have never seen a contract that spelled out my authorization to transfer any “moral obligation” to some other investor, but it sure spells out that they can transfer the legal obligation.

    I believe I have a moral obligation to repay debt that I owe to anyone or any organization, regardless of their status as individual or corporation.

    You keep saying that. Its obvious you “believe” it. The question is why?

    The other question was whether if own any stock or a mutual fund that owns stock, do you “believe” you have a moral obligation to pay its bills if it goes out of business without paying off all its debts? Afterall, what about all those poor investors who loaned your company money. The employees that didn’t get paid. The vendors whose bills are unpaid? Why aren’t you and the other owners “morally obligated” to make them whole but if they owe your corporation money, they are “morally obligated”?

    It seems to me you are inventing a personal moral obligation where there is none. There may have been a time when your “character” or personal relationship with a lender was part of why they loaned you money. And if you borrow from friends and family it still is. But that is not the case with credit cards. These are entirely legal relationships that are spelled out as such. But it certainly serves lenders to have people feel some obligation beyond those spelled out in the contract.

    Just to put this in perspective. Suppose you get hit by a car and die and your widow can’t make the payments on your house. Will the investors who own the loan that you “promised” to repay recognize any “moral obligation” not to throw your family out on the street? I didn’t think so.

  74. Seth says 17 June 2008 at 14:49

    Heh, JD, thanks a lot! Now I can’t find that book (“The Automatic Millionaire”) in Multnomah Co Library. They’re all checked out, with the same return date. Sigh.

    To Ross, et al: Think about how much time you’re spending on this fruitless argument. How many hours have you wasted? Turn those hours into dollars… then put them in a savings account!
    Ding, instant millionaire! 🙂

  75. Joel says 17 June 2008 at 15:37

    “Just to put this in perspective. Suppose you get hit by a car and die and your widow can’t make the payments on your house. Will the investors who own the loan that you “promised” to repay recognize any “moral obligation” not to throw your family out on the street? I didn’t think so.”

    I wouldn’t expect them to, I promised to pay, and I understand that if I don’t that they get my house. They paid for my house, if I don’t pay them back I have no expectation of keeping the house.

    That was one of the points I tried to make to you. My death would not eliminate the responsibility to pay my debt.

    I personally feel morally obligated to pay my debts, even if I was to declare bankruptcy and I wasn’t LEGALLY responsible. It is what I agreed to, and it is the right thing to do.

    This is why I would not encourage a young person to go into debt for a freaking guitar. Who cares if it’s only $2.50/month in interest, you still have to pay for the guitar eventually! This is why we have a credit crisis and record numbers of home foreclosures and bankruptcy filings, everybody has to have it NOW.

    Maybe we should make shareholders (and the overpaid CEO and Board of Directors) responsible for a bankrupt corporations outstanding debt. I’ll bet we would see a lot fewer bankrupt corporations and some reasonable CEO compensation plans.
    Of course that would make incorporating pointless then wouldn’t it?

  76. PDXgirl says 17 June 2008 at 16:03

    haha, Seth- I just put a hold on Automatic Millionaire at Mult Co Library myself 🙂

  77. Ross Williams says 18 June 2008 at 12:54

    They paid for my house, if I don’t pay them back I have no expectation of keeping the house.

    Your expectations have nothing to do with it. You are dead. Your widow and children didn’t make any promises. Why should they pay for yours?

    The answer, of course, is that you had a legal contract that used your house to secure the loan – whatever purpose you used the money for. In other words, the bank has NO moral right to your house, but they have a clear legal right to foreclose and they are going to use it regardless of the consequences to your innocent wife and children.

    if I was to declare bankruptcy and I wasn’t LEGALLY responsible. It is what I agreed to, and it is the right thing to do.

    But in fact, you made no such agreement. You signed a legal contract that under the law included the possibility that you would go bankrupt. And that possibility was figured into the interest rate you paid. In essence, you have paid for insurance and are refusing to use it.

    Its the same as the credit insurance scams where people pay for insurance to guarantee someone else’s investment if they should be unable to repay a loan. The lender can turn around and sell the loan for a higher price because it is insured, making a handy profit financed by the sucker who took out the insurance.

  78. John says 07 August 2008 at 03:20

    Saving money, and paying yourself first is very, very important. many if not most americans do not save, and this is a big problem. Everybody wants to look better than the person next to him/her. “Oh my car is better than yours.” “I dress better than you”, “my house is bigger than yours” The people who usually say this in most cases, actually have little or no money in the bank. They are basically living paycheck to paycheck, to paycheck, or on large amounts of credit, that will take years to pay off. Wealthy people usually, but not in all cases try not to show their wealth. They live in modest mid-sized homes, drive modest older model cars, and dress down for the most part. So just because someone dresses very well, or has that nice SUV, don’t think that they have money, because in most cases they have no money. Having a good sum of money in the bank, is what really will raise our confidence, self image, self esteem. People who have assets and large amounts of money, think different than people who are poor. The mindset is different. Having a rich, wealthy mindset is very important. Finding ways to have multiple streams of income/passive income/letting compound interest work for you are the essentials to building wealth. Just imagine how it would feel to work two jobs, slaving away everyday, like a robot, but have no or little money in the bank. Thats a horrible feeling. What is the point of working two jobs. I was like this at one time in my life, but than i learned how to pay myself first, save with discipline every month, let compound interest work for me, learned how to develop passive income from my savings, developed more streams of income, and I have to say that I feel damm good. I not rich, but comfortable. And if you saw me in the street, you would probably judge me to be struggling, by the car i drive, and how I dress. “Never judge a book by its cover” This is so true. So my friends save something every month, and discipline your mind. Let time work for you. Start reading investment magazines/books, how to build wealth books, etc.
    CHANGE HOW YOU THINK. DONT HAVE A POOR MINDSET.

  79. Phil says 16 November 2008 at 21:25

    Thanks, JD, this is great advice. Next year my wife and I are moving and we will both be getting new jobs. Hers will come with a substantial pay rise. Our plan is to have a large percentage of that rise automatically taken out of her pay and put it into retirement savings.

  80. Jett Brenner says 24 February 2009 at 13:26

    The concept of “Pay Yourself First” is so huge! It is a dramatic shift in thinking that starts you on the path of creating personal weath.

    I finally realized that I was giving all of my paycheck away to the restaurants, the shops, the banker and my landlord. By paying myself first (taking 10% of my money and saving it) I made sure that I would be able to keep some of my hard earned money! This little amount quickly turns into a large amount as time ticks on!

  81. Jett Brenner says 24 February 2009 at 13:53

    Another great trick is to save all of your change.

    Switch to cash to buy everything and make a rule that you can only use 20 dollar bills! Once a 20 is broken, the change goes to the bank. You will still spend all of your 20s, but you will now have some left over.

  82. Shane Rowley says 17 March 2009 at 13:05

    Luckily for me I already have the right mindset! I learned really quick from one year of being in debt. I realized I was going nowhere, and concentrated on crushing my debt and saving money for a house. I’m 21 and looking for a simple house to buy now! After buying my house I plan on never using credit again! I love finances and I love saving money!!!! It is truely empowering and just gets you into a snowball effect towards real wealth! 🙂

  83. Beth @ Smart Family Tips says 19 October 2009 at 05:13

    I recently learned a lesson about saving money from pay raises. I’ve often heard that advice, but never seemed to be able to do it. The lure of “extra” money was too great — I thought about additional monthly expenses that it would cover, or the extra things we could buy.

    However, as a result of the economic downturn, my employer stopped all raises for this year, and likely next year as well. (I do realize I’m incredibly fortunate to still have a job and fortunate that I didn’t have to take a pay cut). What I’ve learned is that while the missing raise is a psychological bummer, financially, we haven’t missed it at all.

    As J.D. points out, we were used to living on the income without the raise. We’ve not lost anything. If my employer does resume giving raises, it will be much easier for me to bank the “extra” money rather than spend it.

    • Jim Wang says 29 October 2015 at 08:09

      When I was working, most of my raises were relatively small anyway. 3% raise on a $60,000 salary is just $1,800. $1,800 isn’t anything to scoff at but it’s about a $100 more a month… as a single guy, $100 more a month isn’t going to impact my lifestyle. I was better off putting that into my retirement savings so I could reap the benefits down the road.

  84. Writers Coin says 19 October 2009 at 05:15

    Like you said, getting started is the toughest part. I started by setting aside $50 a month to my ING account. It didn’t feel like much, but it was basically a night of going out to dinner and drinks, so it was easy to “find the money.”

    As time passes and you get a better handle on things, that number will go up.

  85. Gordie Rogers says 19 October 2009 at 05:24

    Paying yourself first also helps you to be more adaptable. If you are nearing the end of the month and you are running out of money, you will find a way to cut expenses or generate more income.

  86. Sam says 19 October 2009 at 05:29

    We pay ourselves first via the 401K at work so we never see that money in our pay check and then we pay ourselves first again by directing money to both long term and short term savings goals (via auto transfer to ING). Although we see the money that goes to ING we don’t count it as part of our available funds.

    Gross Salary – taxes – 401K = Net Salary
    Net Salary – savings goal transfers – recurring bills – special bills – allowance (what we use for day to day spending) = $0

  87. ABCs of Investing says 19 October 2009 at 05:55

    Funny, I was just thinking the other day that the whole idea of “pay yourself first” is mis-named a bit.

    It should be called something like “make saving a high(er) priority”.

    Typically people will try to save whatever is left over after their normal spending which means the saving aspect is the lowest priority. Putting it first just makes it a higher priority.

  88. Jimbo says 19 October 2009 at 06:11

    The PF blogsphere is slowly becoming useless with every blogger peddling the same advice. I guess there’s only so much about PF you can talk about…

    • Kaley says 29 June 2015 at 15:57

      It may only seem useless to you because you don’t follow the advice PF Blogs are an amazing resource maybe you should start following the advice.

  89. Little House says 19 October 2009 at 06:13

    It’s so true that the longer you wait to establish this habit, the tougher it gets to begin it. I’m still struggling with the “pay yourself first” or put some money into savings before paying the bills.

    This past year my husband had a bit of luck with his business and we were able to save some the additional income that came in. Now, he is back to his normal income and it’s much tougher to do.

    At least this month I set aside a small amount. I have lofty savings goals for the next six months, so I think I’ll have to look into an automatic transfer from my checking to my savings to get these accomplished.

    thanks for the reminder!
    Little House

  90. Funny about Money says 19 October 2009 at 06:14

    Well, “tremendous wealth” might be a bit of an overstatement. But it is surprising how quickly even a small monthly set-aside adds up.

    By the time the Great Desert University quit docking our pay with furlough days, I had learned to live on $500/month less than my alleged actual salary. So when the furloughs ended, I started putting the amount of the “increase” back to my former salary into savings.

    You also can increase contributions by putting the amount of loan payments into savings as you pay off debt. Obviously, if you can afford $300 or $500 a month for a car loan, you don’t need the money to live on.

    Truth to tell, the only way to build credible wealth by paying yourself is to earn more money. What really goosed my savings was getting a second job and putting all the net income from it directly into savings.

  91. Laura in Atlanta says 19 October 2009 at 06:21

    Paying yourself first is indeed the way to go. And truly, you dont miss it!

    I make $47500/year and I’m single.
    10% goes to a 403B through work
    6% goes to TIAACREFF through work (and 3% is matched)
    $5000/year goes to a ROTH IRA
    $6000/year ($1000 every other month) goes to a ladder of 1 year CDs for Long Term Savings

    The hardest part I have on my savings strategy is making sure I can do the contributions to the Long Term Savings plan and I occasionally faulter, having to skip a month about once a year. I dont want to live like a hermit afterall! But overall it does feel so good to have this money socked away and it *can* be done, if you do it automatically!

    Thanks again JD for a great article!

  92. Brenda says 19 October 2009 at 06:55

    Saving through a 401(k) is a really painless way to do it. Even for low-income earners. You don’t even miss that extra $20 out of your $200 paycheck, because it’s taken out before taxes. So it doesn’t FEEL like a whole $20 is absent. Anyone who has access to a 401(k) should open one for themselves. Saying “I don’t make enough” is no excuse at all. If I can do it, ANYONE can do it.

  93. Todd @ Personal Finance Playbook says 19 October 2009 at 07:23

    I totally agree with this as a tenet for personal finance. I would be wary of some of the numbers used by Bach though. He sometimes disregards inflation in telling you how much you’ll end up with and assumes very high interest rates 10-12%, which he calls the historical return of the stock market.

    Most people, including Warren Buffett, doesn’t think it’s reasonable to expect that kind of return, even including dividends (and the dividend landscape has changed dramatically in the last 20 years). Just something to keep in mind.

    Still paying yourself first, and making it automatic, is a vital tool for saving and building wealth.

  94. Rex Huston says 19 October 2009 at 07:28

    The biggest roadblock to becoming wealthy is living like you are wealthy before you really are. By paying yourself first, you take away the temptation to spend. If you don’t have any money burning a hole in your pocket, you wont be able to waste it on frivolous stuff. High interest savings accounts, ROTHS / IRAS and 401ks are a great way to pay yourself first. Great Post!

  95. Shane says 19 October 2009 at 07:28

    I’m 22, making $38k

    In January, I started a 401k putting 4%, with the 100% match, currently $2800.
    I have $2k saved in an emergency fund, and recently started putting $750 per month in that to bring it to six months salary.
    $6k saved for a house.
    I also paid off all my revolving debt this year, including medical bills.
    Now I’m starting to save up $3k to start up a Vanguard Roth IRA.
    Once I get a house, I’m going to concentrate on my student loans to try and knock them out within 5 years.

  96. Oleg Mokhov says 19 October 2009 at 07:42

    Hey JD,

    The secret to a great, sturdy house is a rock-solid foundation.

    And the secret to a great, wealth-building personal finance system is a solid foundation.

    The solid foundation is saving ie. paying yourself. Would you put all your money into fancy furniture and rugs while skimping out on the actual foundation you build your house on? No. So why would you not prioritize your personal finance foundation as well? Pay yourself first.

    Thanks for the solid reminder that paying ourselves first is personal finance priority number one,
    Oleg

  97. RichHabits says 19 October 2009 at 08:16

    Paying yourself first is the Key to being rich. I’ve read in many books like “Richest Man in Babylon”, “The automatic Millionare” and others. First, it did not make much sense in doing. But after repeated reading, I started doing it. It’s amazing to see the money growing. Today, I paying myself first at least 15% to 25%. Friends, it works. And like any habits, this is a habit, but a rich habit. This is the key to being rich.

  98. Sheila says 19 October 2009 at 08:31

    I wish I could find a “high interest” savings account. 🙂 At this point in my life, paying down my 5% mortgage is better than putting money in that elusive high interest savings account.

  99. Rob Bennett says 19 October 2009 at 08:41

    All the money books tell you to do it. All the personal finance blogs say it, too.

    It’s not quite a 100 percent consensus, J.D. The title of Chapter Four of my book (Passion Saving) is “Pay Yourself Last.”

    The suggestion implicit in the slogan “Pay Yourself First” is that saving is always better than spending. It is not so. The goal should not be to save. The goal should be to allocate your money to spending or saving effectively. The aim should be to save when that offers the best value proposition and to spend when that offers the best value proposition.

    Why should the money go first to saving? Is saving really more important than paying the rent? Is saving more important than obtaining health insurance for your family? Is saving more important than having food to eat?

    You suggest that no one ever regretted saving. Many people should regret saving. There are people who won’t go out to a restaurant lunch with a friend because it costs too much and who miss out on hearing about great job opportunities as a result (people often share such information in a relaxed setting and often only a restaurant meal does the trick). There are people who fail to get promotions because they are not willing to spend the money on clothes that would make them look like management material. There are people who perform poorly on their jobs because they won’t spend the money needed for a vacation that would recharge their batteries.

    People fall for the line that saving is always best because it is certainly true that most of us spend more than we should. Most of us should indeed be saving more than we do. But that’s not because saving is inherently the better choice. It’s because we live in a marketing age and the benefits of saving are rarely marketed effectively.

    I believe that people should determine their saving percentage only after having looked at all spending opportunities and having concluded that saving X amount offers the better long-term value proposition. That’s Paying Yourself Last, not First.

    Rob

  100. BR says 19 October 2009 at 08:44

    Im 24, and put 10% pretax into my 401k. In addition, my fiancee and I save somewhere between 30 and 35% of our “take home salary” (this is salary after taxes, 401k, and insurance). But, I hate the idea of pay yourself first. I would much rather keep the “extra” money in our checking account until the end of the month, and then transfer is to our online savings account. This makes sure all our bills are paid, and that we’ve been paid for the next month. Our savings amount always varies, but stays pretty high regardless.

    We just bought our first house – using this savings plan for a downpayment. But we are now using this savings plan for a large downpayment on a car, and a hefty emergency fund in case one of us loses our job. Savings at this point in our lives is crucial – but it seems like there are too many expensive things to pay for (house, wedding, newish car for me, emergency fund, etc the list goes on)

  101. Carol says 19 October 2009 at 08:48

    [Sorry to be a wet blanket, but in an age when 1 of 2 marriages end in divorce… ]

    With regard to the comment on your wife:”… Now she saves 30% of her income…My wife is awesome.”
    I would like to take the opportunity to remind people that if they are married, their spouse’s money is not their money. If only your spouse’s signature is required to access that money, it can be moved around to different accounts, easily spent, etc., by all means you should still praise your spouse, but you should not count it as your personal wealth.

    If your spouse and you put money into a joint account that requires both signatures for withdrawal, then it is safe to count that money as yours. In the event of a divorce, subtract 10% or more for legal fees from the total of joint accounts and take 50% from that remainder.
    You should assume this even in a community property state because sometimes there is fraudulent behavior by 1 or more parties.

  102. thisisbeth says 19 October 2009 at 08:56

    Another “pay yourself first” is as soon as you pay off your car, continue making your car payment to a savings account. You’re used to not having that money anyway. Sadly, I didn’t hear that advice until long enough after I paid off my car, so I wasn’t able to painlessly do it (I’m working my way towards it now).

  103. Paul Williams @ Provident Planning says 19 October 2009 at 09:07

    @Jimbo (#6):

    The truth is that personal finance is not really that complicated. The reason you hear everyone giving similar advice over and over again is because it works. It’s not an easy fix and it’s not quick, but it will help you gain control of your finances and find success.

    It’s not like science where you can do some research and possibly discover something that no one else has ever found.

  104. Kris says 19 October 2009 at 09:08

    Carol @#19-

    While what you say is true, I don’t think that’s the point JD is trying to make. He’s not counting on my savings for himself; he’s counting on it for me. And it shows us that’s we’re working together for a stable financial future.

  105. Kimmo says 19 October 2009 at 10:03

    I think it is very important to revisit these basic ideas, again and again. It’s easy to talk the talk, but not to…

    On the ‘paying yourself first’ concept, however, I am currently having some doubts about its universal relevance. We just recently STOPPED paying ourselves first. The reasons come close Rob Bennett’s comment (#17).

    A large portion of our current income is irregular. In the past we ‘paid ourselves first’ from our regular income, as well as from our irregular ones. As a result our regular income couldn’t cover our regular expenses and we had to supplement them from the irregular ones.

    Paying ourselves first had of course its benefits: we managed to pay back our debts and build a reasonable emergency fund. But it also made budgeting and planning difficult, and it was also quite stressful.

    Our current approach is to try to make our regular income cover our regular expenses. The savings will come from the irregular income.

    We are yet to see if this works. However, I’m currently much more calm, because I now know that our regular expenses will be covered every month. So there is no desperate need to get extra income to fill in for the basic expenses. Funnily enough, it also makes me more motivated to do extra work, because I know that the income produced will build our savings rather that just be spent on everyday stuff.

    (Note: We live in Finland and the concept of 401k’s and Roth IRAs and what-have-you don’t apply. The benefits from saving through these instruments are probably undisputable, as far as I understand the system.)

  106. JenK says 19 October 2009 at 10:05

    I’ve never met anyone who does not wish they had started saving earlier.

    Yes and no. My parents had created a trust account for me, which I could make deposits into but not withdrawals — at least not until I was 18. My parents could make withdrawals, however, and did, when they fell behind on their mortgage when I was 16. $600 of babysitting money GONE.

    (After all, they needed it and I lived in the house too, right? **steam pours from ears**)

    I CERTAINLY regretted saving that money at the time. If I hadn’t saved it, then at least *I* would’ve had the benefit of it.

    A few months later I opened a new, individual account for myself. At a different bank. I didn’t tell my parents.

    Years later, though, I was still dealing with the fear that any money I put in savings might disappear.

  107. Brent says 19 October 2009 at 10:22

    Always liked the pay yourself first. I myself do the 401K thing. But after the money goes into the bank I have done something I don’t think many do. I have a big plan that takes a fixed amount from every paycheck and allocates part or the whole to different things in order to achieve a goal by a certain date. I wrote down all my big money goals and when I wanted them by: stages of an E-fund, car savings, home improvement savings, PMI payoff, extra towards retirement. So Each payday I mark off that entry in the spreadsheet and I can see where I am on my plan. The plan actually goes out to 2011. Obviously If something goes wrong that plan might have to change, but for right now it keeps me on track with my long term goals in very concrete steps. If nothing else it is the motivator to save.

  108. Beth says 19 October 2009 at 10:27

    @Rob Bennett — I like your perspective 🙂 I certainly wouldn’t contribute to my savings if it meant not being able to pay my bills. Simply avoiding late fees and interest charges provides a better return than most savings accounts right now!

    I’m grateful that I can live below my means and make regular contributions to my savings, even if it isn’t a ton of money. I don’t consider these automatic payments as “paying myself first” because I’ve set goals and priorities. I guess the whole point is to make savings and investing a part of the financial plan, not an after thought.

  109. Tyler Karaszewski says 19 October 2009 at 10:42

    This is one of my personal favorite financial fundamentals. If you combine it with “spend less than you earn” it makes the rest of personal finance *so easy*.

    Here’s how I do it:

    1) Pay yourself first. Have as much money as you’d like to save deducted automatically from your paycheck, or your bank account on the day you get paid.

    2) Whatever is leftover is what you’ve “earned”. Don’t spend more than this.

    That’s it. You can buy anything you want. You don’t have to budget at all. You come out ahead at the end of every month. If you have money in your checking account and you’ve already paid your bills for the month, go ahead and buy whatever you’d like. If you haven’t paid your bills, pay them. Whatever’s leftover is free money that you don’t need to keep track of. If you’re not sure how much your bills are going to cost, estimate high and don’t spend that money until you’ve received them and know how much they’ll be. Really, you can wait until after you get the electric bill to decide if you can afford a new iPod.

  110. Chett says 19 October 2009 at 10:47

    J.D.

    This post would have been a great time to remind readers of the balanced money formula from All Your Worth.

    The great premise behind that mix of money management, (20% savings, 30% wants, and 50% needs) is, if you follow the 20% savings rule first, who cares what you do with your needs and wants. It’s really a matter of personal taste and levels of comfort after that.

  111. Tyler Karaszewski says 19 October 2009 at 10:58

    @Chett:
    Any formula that allocates 50% of your income to needs only applies to people who make exactly twice a subsistence salary, does it not?

    How does a migrant farm worker apply this formula? He doesn’t make twice the amount of money necessary to survive. How about a cardiac surgeon who earns $300k/year? He’s supposed to spend $150k/year on food, clothes, and housing?

    Seems like a formula with less than general applicability, to me. In fact, the percentages seem quite arbitrary.

  112. Cath says 19 October 2009 at 11:32

    We pay ourselves first, third, AND last. We have money taken out for 401k before we get the paycheck, then pay all the bills, including predetermined monthly contributions to our ING accounts, then leave the rest in checking as spending money. The day before the next paycheck, anything leftover in checking goes to ING.
    We are about to tweak this plan a bit, however, to include a monthly “bill” to our Roth IRA’s as well.
    We’ve saved quite a bit this way, and it is satisfying, not painful!

  113. Foxie | CarsxGirl says 19 October 2009 at 11:53

    I think I’m pretty good at this, though it’s not exclusive for me… And I probably do need to save more, but I really don’t want to live like that much of a hermit and regret not living life to the fullest (that I can afford) while I’m young.

    That said, last year I made a goal to save $1,000 towards retirement. I had that $1k in my Roth IRA, and have added $300 to it this year. I also signed up for my 401(k) this year, putting in 4% of my earnings and getting a dollar-for-dollar 4% company match. (Immediate vesting, too! I wish I had done it last year.) So far, I’m on track to contributing $1k to retirement this year, and may even exceed it! For the most part, it has been very painless as well, as the 401(k) contributions are gone before I even see how much I made.

    I also set aside for emergencies, and I’m currently setting aside money to pay off my $2k car loan, which I should have enough to do by the end of the year. After that’s paid off, I’ll work on finishing up the project and move on to saving for the next car/project, tattoos, or any other expensive l’il thing I’d like. (A dSLR is high on my list, plus photography classes and things like that.)

    Like others, I also pay myself last… Sweeping any unspent “spend” money into my car’s account for the big loan payoff. Sure, it might only be $8 left of my $35 “allowance,” but it all helps!

  114. Walter says 19 October 2009 at 11:58

    @ Tyler # 29

    There are always going to be exceptions to any rule and or advice stream. One thing I have noticed about migrant workers is that very often they cohabitate with other migrant workers, such that their living arrangements are spread out among many. It allows them to save on rent and utilities as well as to ‘send money back home.’ So they may not have to have wages twice the subsistence level if the subsistance level is altered due to “unusual” living arrangements.

  115. Greg says 19 October 2009 at 12:15

    I tried doing the pay yourself last, I couldn’t get it to work. My left over money just stayed in my chequings account just in case. I do have a Canadian Savings Bond setup at work for an automatic withdrawal from each paycheck (up to $650 now), plus my work pays 5% of my salary into my RRSP, so I did have some automatic savings already.

    But because of this post today I set up an automatic $25 withdraw every Monday into savings (for that $1000 emergency fund). It’s only 3% of my take home, but it’s a start. I also maximized my CPP and EI deductions, so that freed up $180 per month til the end of the year. Conveniently just in time for xmas.

  116. MSM says 19 October 2009 at 13:08

    Another good place to set aside money is in a Health Savings Account, if your health plan qualifies. With payroll deduction, the tax savings are similar to 401(k), you have the social security tax savings on top of the normal 401(k) tax savings and most banks offer nice interest rates and money market opportunities for Health Savings Accounts. Your money is accessible if you need it for health care out of pocket expenses.

  117. Sunandshine says 19 October 2009 at 13:15

    Every month, we save atleast 40-50% of our salary. Sure we have made mistakes and still make some but the habit to save never goes down. Its not a chore to save but we take fun in doing so:)

    #19, Carol

    We dont stop living because one day we are going to die. Similarly, people dont get married thinking that they will get divorced some day! Without trust, the institution of marriage won’t survive. Between me and my husband its not “my” or “his”money, its our money.

  118. Generation Y Investor says 19 October 2009 at 15:30

    I love the concept of paying yourself first. The idea that some people work… pay for taxes, bills, fun and then save what’s left doesn’t sound appealing to me. I work for myself… not the bank, credit card co’s or clothing store… therefore I pay myself first.

  119. Jon says 19 October 2009 at 15:35

    I’m 33. Wife and I make 240k/ year. We should be living large, right? No way. We live as though we make maybe 65k/yr. Cars paid off, no debt. This has allowed us to save almost 300k in cash savings after all retirement vehicles funded.

    Pay yourself first is really just shorthand for “spend much less than you make and bank the difference.” It requires some diligence but is self-reinforcing once you see the money grow.

  120. Frugal Bachelor says 19 October 2009 at 16:43

    @ Tyler

    “How does a migrant farm worker apply this formula? He doesn’t make twice the amount of money necessary to survive.”

    Try triple or quadruple. The money migrants workers are able to save would be shocking to a lot of people, and belies their outward appearance. People don’t risk their lives, and move far away from their friends and family, to enter America to lead a life a subsistence. They can do that back home. They come here to earn gobs of money (and send it home and/or save it).

    The best stories of frugality today are where some guy arrived to the USA through the backroads, spends 5 years picking raspberries, and in doing so is able to save enough to pay cash for a nice house back home in Guatemala. Why aren’t these stories getting more attention in the personal finance press? People who have no labor skills, don’t speak the language, and were born in the wrong country have mastered the system, where as most people who are born here, live and die without ever figuring it out.

    “How about a cardiac surgeon who earns $300k/year? He’s supposed to spend $150k/year on food, clothes, and housing?”

    And so you have lifestyle inflation if you follow the 50% balanced money formula which JD advises. The more money you make, the farther you have fall should your income dry up, and your chance of suffering a big income drop is commensurate with your income. Going from the $300K/year lifestyle to a $100K/year lifestyle must be pretty rough if you’re spending 50% of what you earn. This formula may be applicable for people in sweet spot of maybe around $50K-$100K a year, but not outside of that.

    Where frugality gets interesting is when you are earning like a cardiac surgeon, and saving/spending like a migrant farm worker.

    • Kaley says 29 June 2015 at 16:03

      Your rant has nothing to do with the article of Pay Yourself First. A surgeon who makes a lot of money doesn’t have to spend a lot there are a lot of rich people who save too they aren’t all going out there buying $150,000 cars. And your income comparison from a migrant worker and a surgeon is hilarious I know a few people who make minimum wage and refuse to go to sales, use coupons, etc… because they think it’s only for poor people yet they are poor because of their mindset anyone no matter what income can either be a great saver or a financial hole.

  121. Sassy says 19 October 2009 at 16:57

    I have always paid myself first from my first after school job at 14. Then from the moment I had my first full time job at 18 I saved at least 10 and mostly more like 15% of my salary by direct deposit.

    Because of this I have been able to travel all around Australia, take two years off work and live in Europe, buy an investment property and I am just about to buy a property for me to live in.

    All because I paid myself first, so I knew what was left over after I paid my rent, bills etc, was mine to spend any way I like.

    Has worked for me for over twenty years.

    S

  122. David says 19 October 2009 at 19:24

    I think this is a point that is not mentioned enough.

    When I was sinking deeper into debt, of course I was the only one I was paying. However, on the way out of debt, after I knew I was doing the best I could, I did pay myself first.

    You have to to avoid going crazy. Plus, if you are at least sending your creditors something–they’ll be alright.

  123. Jan says 19 October 2009 at 20:03

    Those with a stay at home parent- make sure they “pay themselves” as well. There is nothing more frustrating than to see my dh’s account so much larger because HE was the one working outside of the home.
    Match BOTH accounts for retirement. It will cause fewer problems when your marriage turns twenty.

  124. Wes says 19 October 2009 at 21:19

    I work and she takes care of the house and our son. We don’t have any friends that are in even close to as good of a financial position as we are and they all make double or triple what we do. The secret to our success is sharing every aspect of our lives and making decisions together about what is best for us and our family. We don’t technically pay ourselves first: we agree on our priorities first, budget second and ultimately pay ourselves first and last with what is left.

    All of those friends seem to have separate finances with totally different directions and priorities. Our multiple accounts are: House, College, Next House and Emergency rather than His or Hers and it has worked great for us. Don’t get me wrong- one of us (me) definitely has to be the aggressor/captain but it is still a team effort and we are a great team.

    My apologies if this seems confrontational – just feel like there should be some positive contrast to the prevalent His and Hers comments here. There is a way to combine finances successfully and it is 99% communication.

  125. Paul in cAshburn says 20 October 2009 at 05:30

    @Jon #37:
    “Pay yourself first is really just shorthand for “spend much less than you make and bank the difference.” It requires some diligence but is self-reinforcing once you see the money grow.”
    I think you’ve nailed it Jon. If a person or couple lives below their means, and saves the rest, they’ve got the concept right. The rest is just details. Important details (because you have to ensure you’re living the right amount beneath your means), but details nonetheless.
    So, master the basic concepts, and live them, and then optimize as you see fit. There are many sources for different optimization strategies. Pick one that makes sense for you and yours, and go enjoy life!

  126. heironymous says 20 October 2009 at 07:17

    Definitely wise advice. But also don’t forget that money isn’t the ultimate goal. You want to live a happy and well-adjusted life. That includes amazing vacations, splurging on fancy dinners and doing things on a regular basis that make you happy.

    Just make sure you earn the money _first_ and then buy the pretty new gadget. (Speaking as an IT guy – cutting edge is bleeding edge – wait at least 6 monthes before buying new hw to run Windows 7)

  127. FamilyOnABudget says 20 October 2009 at 07:27

    In January of this year we maxed out our 401K contributions at work and have been adding a fixed amount to CD’s and our ING Account each month. I am surprised at how quickly the savings adds up.

  128. joruva says 20 October 2009 at 08:12

    J.D., I notice you mention your wife’s automated savings and not your own. Does fluctuating income play a role in this?

    I currently automate my finances heavily because I have a steady income. For those business owners and entrepreneurs out there, how do you automate your finances when you have fluctuating income? Just a larger cash cushion?

  129. Alex says 20 October 2009 at 19:06

    But should you save money first when it looks like you’re going to have to take out loans just to make ends meet? I’m in grad school on a $20,000 a year scholarship and my wife, just out of undergrad, was only able to find a stable job in her field with upward mobility at minimum wage. With school loans about to come due, we’re going to earn $1,100 per month (since my scholarship went to pay for health insurance this semester and is therefore all used up) and we’re going to owe around $1,700 per month. Shouldn’t any extra money, in this case, go towards paying off the additional loans that we’re about to incur due to me earning only, after paying for school, $7,000 per year and my wife earning below the poverty level?

  130. me says 21 October 2009 at 13:08

    What’s the average high interest rate? …cause yearly inflation is 5% in USA…

  131. Your Roth IRA says 25 October 2009 at 06:56

    Excellent advice, especially when it comes to putting away more of your income as you earn more. In fact, starting a business is good idea for a lot of people. I’m sure GetRichSlowly.org adds a bit to the bottom line each year which can be saved in a Roth IRA or high yield savings account. And a part-time business also allows owners to take tax deductions which leave money for investment. But, of course, pay yourself before you invest any resources in a part-time business!

  132. LM says 25 October 2009 at 07:58

    JD I m glad that you use your wifes case as an example. I can reiterate what she is doing and know how powerful it can be out of my own experience. You can see the results I have had with this technique when applied consistently over more than a decade: http://www.wealth-steps.com/personal-finance-tip.html

  133. LaLaLand says 03 November 2009 at 06:43

    This is just a personal story of how strong the psychological effect of teaching yourself to pay yourself first, can have.

    I am a 25 year old single woman who was only making about 25k/year. I lost my job 1 month ago (2 months after purchasing my first house and 1 month after purchasing a car–after my very first and only car, a 10 year old Mazda I drove since high school, gave out 1wk and 1 day after closing on the house). For the first time since I was 16 I am living on no income (only my emergency funds), and with about $1,000/month more in bills than I had 3 months ago (and more monthly bills than I’ve ever had in my life).

    Even after all of this, I can, at the least, afford to pay my mortgage, car, and bills for 3 more months. I’m a FTHB that bought a house in August and I’ll be getting an 8k tax credit about the time I would be running out of money (assuming I haven’t gotten a job by then.)

    Although my funds are dwindling away I still pay my savings account that I’ve been building since I bought the house, every two weeks as if I were still getting a paycheck. The worst thing that could happen is I would need to use that money. The best thing that could happen is I get a job soon and now I have income again plus a still-growing savings account. Of course then my emergency savings will be a pile of poop by then but at least it’s a start.

    I’ve learned my lesson though, EMERGENY FUNDS EMERGENCY FUNDS EMERGENCY FUNDS. Instead of using the 8k to pay off my car like I was intending, half of that sucker is going towards rebuilding a 6-12 month emergency fund. The only reason why I had the “emergency funds” is because the home I bought was a fixer-upper and I needed to have money left over. Fortunately I had my wits about me and was determined not to spend a cent of that money until I’d built my savings back up to at least a few months income. Unfortunately I was laid off before I could build my savings so my “house funds” became my “emergency funds” by default. Meh, so is life. BRING ON 2010!

  134. LaLaLand says 03 November 2009 at 07:42

    I just wanted to add that I do have a Roth IRA, just over 7k. I put $1000/year into it, but I couldn’t this year, I had to use that money towards my home down-payment. I don’t have a 401K yet, but the second I get a job, especially one that offers matching, I will fully fund it.

    My future financial goals are to diversify my saving accounts. I currently only have my checking, my savings, and my ROTH. I’d like to start an e-fund, money market (to put extra money towards paying my mortgage off early). A 5 year CD ladder, and of course the 401k. I’d also like to be able to start a high-yield savings/investment accounts with about $500/year for my niece and 2 nephews.

  135. LaLaLand says 05 November 2009 at 07:27

    Update. I have a job now (that pays 25% more and is 40 minutes closer). Although I’ll have lost two paychecks in between where I got my last paycheck and where I’ll be getting my next one, I haven’t skipped a single payment to myself and hope to give “myself” a 50% raise ;).

    I wanted to add that I also like to think of “paying myself” as paying a bill. Light bill, car bill, Laura bill. I give myself a credit card allowance for each month that gets paid off monthly; I like to call it the envelope system for credit cards. If after bills/savings are paid and I don’t have enough left over to cover next month’s allowance (which I rarely spend anyways), then I cut that budget beforehand.

    I ALWAYS KNOW HOW MUCH I CAN SPEND BEFORE I SPEND IT. Because of this I rarely, if ever need to take money out of savings. Believe me, this took so long for me to learn. I’ve never really saved short-term before (like for vacations, new clothes, etc etc.) because I just buy what I need and what I want with left over money in my checking after bills and savings are paid. And best of all it is GUILT FREE because it is pre-designated as “fun-money”. I also tend to be more particular about what I buy, and therefore tend to only get stuff I really love.

    I personally save more with long-term, big-budget goals in mind (retirement, home improvements, paying off mortgage, paying off car, building substantial emergency funds, building investment funds). With my CC allowance method each month I can buy whatever semi-major thing I want, I just can’t buy more than the allowance for that month covers, and I have to wait until the next month if additional wants push me out of this month’s budget.

    If I have a major expenditure coming my way (vacation or furniture) I underspend my CC allowance for a couple months until I’ve built up enough cash in checking to assure I can cover an inflated CC bill.

    KNOW WHAT YOU HAVE TO WORK WITH AND WORK AROUND THAT. That is the key purpose of paying yourself first. You will be surprised what income you can adjust to and don’t feel shy about playing with that level until you reach a place that is both functional and enjoyable for you.

  136. Vas says 11 November 2009 at 23:15

    Always pay yourself first. You have worked hard for that money and it is yours. The rest can wait. Major companies follow this philosophy so why should we not.

  137. Sean says 01 January 2010 at 03:54

    It should actually be “Pay Your Investments First”. Sure savings is great, but you need to keep your money moving rather than being parked in a savings account. Over time your investments will pay for your luxuries.

    First you need to take control of spending & track every single cent that comes in and out of your accounts. Its amazing how much excess spending you can cut back on by being stringent and tracking everything. At the end of the month, any additional cash thats left over, goes into savings & investment.

    Than the next step is to be creative and look at ways of increasing income by adding additional income streams, be it a part time job, a part time business or selling items on EBay.

    The same creativity can be applied to expenses & looking at ways of saving money.. making your lunch everyday, growing your own vegetables, getting rid of cable.

    Any goal or outcome is achievable if you plan for it

  138. melogos says 13 September 2010 at 13:00

    Why isn’t this concept being taught nationwide in our public schools, colleges, and universities? Could it be because those in charge don’t know this simple, yet profound principle? In light of today’s economic climate, managing one’s finances and saving for one’s retirement should be a top priority for every American. This article does an excellent job outlining several steps toward financial security. Especially useful is the concept of saving a percentage of one’s income. I just read about an interesting concept called the 10/90 principle…paying yourself first by investing in your financial future. It advocates paying yourself at least 10% of your income and living off the remaining 90% http://www.christianretirement.com While it may seem selfish to some, I feel that if I do not take care of my own financial needs no one else will. I have been following the 10/90 principle (paying oneself first) for years, and it works wonders for your finances. Great article!

  139. Karan Batra says 27 September 2012 at 08:19

    Its a very old saying that – “Penny and Penny make many”, and this qoute still holds true…

    In our quest to satisfy our Short Term Goals, we usually end up spending more than what we earn and dont save anything which lands us in trouble in future

  140. Ghulam Mustafa says 23 January 2014 at 05:15

    Wonderful article bro. I loved it. Thanks for sharing.

  141. Autumn says 08 April 2015 at 06:39

    Saving is a good habit to start. especially when you’re younger because your mindless about spending since most the time its your parents money. But once you get a job, you think more but all the money is still spent within a few days. Although, if we set aside money before we spend, we could eventually have enough money to buy a car instead of pressuring our parents.

  142. Samuel says 08 April 2015 at 06:41

    You must have a plan for your future. That plan is saving money by paying yourself. Throughout your years the amount of your savings will increase slowly but tremendously.

  143. Adam says 09 July 2015 at 05:01

    The YNAB Method. Learn it, live it, love it.

  144. AMW says 09 July 2015 at 05:29

    Paying yourself first is definitely the way to go and much easier than it was when I first became an adult due to the availability of direct deposits! Now it is one decision and you never have to make it again!

    • Debi says 09 July 2015 at 13:02

      Try to rethink it everytime you get a raise at work. Increase your saving by some percentage of the raise. If you’re increasing your 401k or IRA contribution it’s even better because those are pre-tax dollars and don’t affect your net increase as much. Bigger bang for your buck.

  145. Harry King says 09 July 2015 at 05:53

    This is a good read. Literally the best advice one can give in attaining financial stability in the future.

  146. [email protected] says 09 July 2015 at 06:31

    As our income changes over the years we have changed our budgeting style. When we had two incomes and more money to spare the zero sum budget was WONDERFUL. We have never saved as much money as we did when we budget this way.
    Our income would go into the savings account we use for our emergency fund to wait to be used the next month. It was VERY hard to pull the money back into checking. It felt like staling from our savings. This resulted in finding more ways to spend less and keep it in savings.

  147. freebird says 09 July 2015 at 08:20

    I’ve lived this from the opposite perspective, my habit was always to procrastinate on spending. I’ve never had a budget or a savings target, but I got the same results– from viewing spending in terms of the opportunity costs. Every dollar I spent at age 20 cost my 70 year old self thirty dollars because of the annual growth rate of 7% I’d give up. And the flipside is that my low annual expense rate shrinks my net worth target to financial independence, so I can buy my freedom faster.

    A consistent high savings rate like 50% of net means you can reach your number in not very many years. I hit mine at age 40, and while my life isn’t filled with fun and excitement (not that spending more would help), I’m glad it’s also not filled with anxiety about layoffs, unexpected expenses, or stock market crashes. I’ll take boredom with a good night’s sleep.

    You’re the Jones people should try to keep up with!

  148. Sanjeev Shrestha says 09 July 2015 at 08:47

    Great Article Holly !! You have explained it so well, the power of paying yourself first. On top of that, I would add 2 things.

    They are:

    1) MAKE IT AUTOMATIC: This is a surefire way that you don’t have to remember moving money to your saving accounts. For me, 3rd of every month, money gets transferred to saving and investments accounts automatically.

    2) MAKE it percentage of income rather that dollar amount: For instance, instead of $1000 dollar amount, put like 20 – 25 % of the income. That way, when we get a raise, or bonuses comes, the saving automatically goes up. You will NOT miss it.

    “Pay yourself First”, “Make it Automatic”, and “Staying Debt Free” are the most powerful personal finance concepts, I think, anyone can apply.

  149. Alea says 09 July 2015 at 09:29

    Holly, great article. Although I have never used the zero-sum budgeting, I treat savings as another bill that needs to be paid. And who is that entity whose bill must be paid? ME!

    Like the cell, cable, insurance bills, my contribution to my ROTH is a bill, and my contribution to my savings is a bill. For me if I didn’t see it as a bill, I might blow it off, but if I place it in the bill category, it gets paid off because I never skip any payments. And it worked, slowly, month by month the money adds up.

  150. Bryan@ Just One More Year says 09 July 2015 at 09:36

    I couldn’t agree with you more on the value of paying yourself first. 🙂

    This practice puts into place a mentality that says I am controlling where my money goes and my priorities are more centered on saving and investing. What is left will be used to pay the recurring bills and the discretionary purchases. I wished I had figured that out in my early twenties.

  151. PJ Ryan says 09 July 2015 at 10:02

    The beauty of paying yourself first is that it forces savings to become a non-negotiable in the same way rent/mortgage, utilities, etc. are. I never shied away from paying my rent or internet because I viewed those as non-negotiable in order for me to live the life I wanted to live. Savings, however, seemes like it was taking away from my life. Once I mentally changed it into a non-negotiable, I stopped resenting it.

  152. Levi Henrikson says 09 July 2015 at 12:49

    Thanks for sharing your thoughts on budgeting Holly. I’ve never heard of the zero-sum budgeting system before so it was very interesting reading your description of it.

    It seems like a good idea, but I imagine the hardest part would be getting a month ahead. (I already feel like I’m a month behind!) How long did it take you to get a month ahead on your finances? Do you have any practical suggestions on how to go about doing it?

  153. Jennifer Hardaway says 09 July 2015 at 17:49

    Thanks for the great article! Can’t wait to read the Zero-Sum Budget article too!

    I am a business owner and last June (2014) I began the Profit First (by Mike Michalowicz) method of saving and operating my business. It’s a very similar process to this and I saved for Fed Taxes, Sales Tax, Profit, Owner Pay, Operating Expenses etc. I have all these different accounts that I transfer money to in order to take care of all the things a business owner needs to stay afloat and not go into debt.

    Plus, I have applied it to to my personal accounts as well. As soon as I get paid, I transfer 10% into my regular savings and have three retirement accounts that get $1000 (combined) each month. I have NEVER saved for anything. This is truly a miracle. I am still living “paycheck to paycheck” as it were, but I have savings. Maybe I will try to apply the pay your bills a month ahead to get that down too.

    Thanks. I love this blog!

  154. Kevin says 09 July 2015 at 19:10

    I have done this for years. I paid off two homes, own a condo, $$$ in CD`s and savings. I live on one week of take home per month and save 3 weeks of take home. When I bought my first home I made sure my mortgage payment and taxes were no more than one weeks take home….real sense of security.

  155. CalLadyQED says 10 July 2015 at 01:07

    “As we all know, the best use for extra money is to pay down debt, if you have debt, or to allocate it straight to your savings account, retirement account, or other investment vehicle.”
    Um, no. The best use for extra money is whatever will bring you the most utility/happiness. That might mean paying back creditors. That might mean saving it. That might mean spending it. That might mean giving it away. But saying that it must go toward debt, if you have debt, and investments otherwise seems to go against what the basic idea that money is a tool for you to get more out of life. Money is for man, not man for money.

  156. getagrip says 10 July 2015 at 06:23

    Paying yourself first also doesn’t have to feel like any kind of sacrifice if you do it smart and also when you make it automatic. This can also work for those who don’t think about budgeting and don’t seem to “get it”. Many years ago, I got an in-law to agree that they wouldn’t miss $20 a week, it was “in the noise” of their life. We went on-line and they simply had it deducted from their incoming bank account to a secondary account with each paycheck. When I visited a year later I asked them how the account was doing, we checked and there was just over $1000 in there. They hadn’t even really bothered to notice it. I congratulated them on putting something away for the future, talked a bit about long range planning, and they did a lot of head nodding. Next day they went out and bought a new Playstation and a bunch of games.

    Well, you just don’t win them all.

    However, last year the same in-law was griping how they had little money saved, they were getting older, etc.. I reminded them about “that time” and how just that $20 a week did and suggested they might want to approach retirement with $30K or $40K in savings versus the nothing they have now. This time, I’m hoping the lesson took and they do better than I suggested.

  157. Ely says 10 July 2015 at 09:43

    Selfish? Do people really think that? I understand that it’s not always the default, and that some people struggle with the idea that they CAN put money away, but once you get over that it’s pretty much a no brainer.

    I agree with comments above suggesting automation. I have money automatically transferred to 401k, Roth, tax/insurance fund, emergency fund, and general savings. Then when I go to pay the tax bill, or when there’s an emergency, the money is magically there. It’s wonderful – and I mostly don’t miss it in the meantime.

    • Frank says 10 July 2015 at 14:29

      Yeah, “selfish” struck me as an interesting phrase, too.

      Rather than argue whether it is “selfish” to pay yourself first, I would like to propose it is selfish NOT to pay yourself first…

      How would one take care of themselves when they are too old or in too-ill-a-health to work for a living? If you haven’t 1)saved capital or 2)put money into a business or 3)inherited some means, then you won’t be able to care for yourself. You would become dependent on family? Friends? Charity? Welfare? All of these mean that someone else is taking care of you. Someone else has to get up each morning and go out and work to support you. If you get into that situation through no fault of your own like a cancer diagnosis- well, that sucks. But, if you worked 30+ years and never saved anything, then you PLANNED to be in this situation or die young.

      It seems to me NOT “playing yourself first” and planning to have others take care of you is the real “selfish” move.

    • Merry says 15 July 2015 at 15:11

      I personally don’t consider paying yourself as selfish. But some of my in-laws seem to think this way. It comes up mostly during family vacations, when they expect us to spend as much money as they want to. When we try to opt out of expensive activities, they call us selfish for choosing saving money over family time. Also, sometimes they pay for us and then make us feel guilty for taking money from family members who are struggling financially. I want to point out that they wouldn’t be struggling as much if they didn’t insist on choosing expensive entertainment for family vacations.

  158. Alexandra @ Real Simple Finances says 10 July 2015 at 09:44

    Paying yourself first is so important, and it’s also usually the first thing to go when finances get tight. My husband and I spent all spring paying ourselves first, and the results were amazing. We are so happy with our savings!

  159. Dollar Bits says 10 July 2015 at 22:07

    Excellent article. Great information. I particularly like the bullet: You learn to live on less. Stashing away 10, 20, or 30 percent of your income might cause you to feel the squeeze at first, but you eventually get used to it. And more importantly, you’ll be saving huge sums of money all along.

    I believe that many people can live on less and once they get comfortable carving off a portion of their pay, and get used to living on less, savings / investing becomes automatic.

    The earlier you start, the more time you have for your money to compound.

  160. Mysticaltyger says 11 July 2015 at 15:06

    For many people, Pay Yourself First works fine. But for many who have taken on too many financial commitments (kids, cars they can’t afford, too much house, etc.), they really need to address those lifestyle issues first. You aren’t going to make any headway if you don’t address those larger lifestyle choices first.

  161. thecruiselady says 13 July 2015 at 11:18

    Paying yourself first is very SELF-ish. If you don’t take care of yourself first, who will?

    I was fortunate enough to have a job with direct deposit. And they would even make deposits to more than one account. I had deposits made to emergency fund, new car fund, Christmas gift fund, and house down payment fund, and vacation fund. In all, I had about 40% of my take-home pay banked each month.

    On the other hand, my late life-and-business partner didn’t care about spending. The attitude there was spend first, ask questions later, the other half will find a way to pay for it all.

    Because I was hoarding money in accounts in my name only, I was able to pay for all of his medical/death expenses. I have enough money in the bank to buy a nice used car. The credit card is paid off each month.

    People, do yourselves a favor and get SELF-ish. Even if you only set aside $20 a week, start now. It only hurts for 3 months. Then increase your savings every three months.

  162. Chella says 14 July 2015 at 18:04

    I definitely like this part: “Your savings and investments become a priority, not an afterthought. Without a budget or any type of plan, it is easy to get into the habit of saving whatever is left over at the end of the month. However, when you pay yourself first, you are forced to put your savings goals first and foremost”. It really makes sense.

  163. Camilla Hallstrom says 16 July 2015 at 04:45

    This is so true – paying yourself first has an impact on everything else in your financial life. Without following this principle, it’s hard to actually save up anything. I also think it removes a lot of direct financial stress, which in turn affects your performance and other aspects of life.

  164. Andrea says 28 July 2015 at 04:19

    I’ve always made automatic transfers to my savings account and it has made a huge difference. Within the last 6 months we have been able to bank most of my husband’s income and its being growing like crazy. We make a zero budget and make sure we are savings lots. Also every year I get an inflation sized raise so I use that to boost my mortgage payments.

  165. Jon @ Penny Thots says 28 July 2015 at 05:23

    For me, it is all about automation to save money. I don’t want to have to think about saving money because odds are, I will forget when I get busy. So I just log onto my bank and set up a transfer for a certain dollar amount every other week. I do nothing and money gets moved to my savings account for me. It’s painless and it works.

  166. Kyle says 28 July 2015 at 07:24

    I think if you’re coupled up and living together and both working you should always have you’re basic expenses able to be covered by the person with lower wages. You’ll stress a lot less when life throws you a curve ball.

  167. getagrip says 28 July 2015 at 07:47

    I’ve focused on strategies 2 and 5. Putting something away, even if starting small, and building it as you can has helped me even when making other poor financial choices since you tend to live around the money if you keep the primary balance out of sight or in a form that is hard to access without penalty or actual effort (e.g. 529’s and 401K’s).

    Yet despite starting big or small, what I’ve seen is that so many people fail to actually start at all. Stunning how hard it seems to do that and how many folks will agree and yet never start. Talk to HR, or get the form and fill it out, set up the bank account and have the allotment sent from your pay, etc. Once it’s set up, adding to it is often easy. It’s that initial action I, and many I’ve spoken with, seem to delay.

  168. Bryan@Just One More Year says 28 July 2015 at 09:28

    I couldn’t agree more with your strategies. They are really quite simple in describing but often difficult for people to implement.

    For us, the biggest improvement was paying ourselves first. This means we save or invest each month automatically before money is spent on the rest of the bills. It does become addictive on how you can begin to build a nest egg. Then for us it was when we created a side hustle to build a passive income, we are now able to earn money 24 hours a day.

    Stay focused on strategies like this for a decade and you will arrive in a completely different financial position than you are today!

  169. Laura says 28 July 2015 at 10:22

    Paying yourself first is totally the way to go, even if you’re living paycheck to paycheck.

    When I first started doing this many, many years ago, it took awhile to adjust my mindset about using those savings. Since I was in the red, what often happened was that I’d save up a few hundred dollars, then some situation would come along and I’d be pulling that money out. Wash, rinse, repeat. I’ve learned this is a red flag that outgo exceeds income and some creative techniques needed to be implemented. I came to realize something important: that even if I couldn’t close the gap, just narrowing it helps! Over time, the amounts I needed to pull from savings diminished and the trips to the credit union became fewer and farther between. Although I still juggle the budget much more than I want to (sadly, the gap still hasn’t fully closed), I also don’t dip into the savings anymore unless it’s truly crucial (last time was for necessary house repairs that had to be done immediately).

    So my advice for anyone new to this who doesn’t see how they could possibly do it is to start anyway. If nothing else, then you have something to draw on when life decides you need another challenge. It does get easier over time, but only if you start.

  170. Ali @ Anything You Want says 28 July 2015 at 10:23

    I really like the idea of finding small ways to cut back and then putting any money you save into a savings account. Helps reduce lifestyle inflation and save money!

  171. Debt Hater says 28 July 2015 at 11:16

    I like finding ways to slowly cut back my spending. That means more money that I’m able to save or put towards debt.

    I also agree that it’s important to start small. If you have unrealistic goals you may become overwhelmed and then not even try to reach that goal.

  172. Alexander @ Cash Flow Diaries says 28 July 2015 at 14:47

    Im a big proponent of investing my side gig income into more investments. I live off of my day job money, and I invest all the money from side gigs into rental properties. Its really working out great for me so far and hopefully I can keep doing that until im making enough passive income to retire early!

  173. Bobby Treats says 28 July 2015 at 14:53

    These are great tips on how to pay yourself first. Specifically, the second strategy of starting small is important. I started this way by saving a few dollars here and there. I soon became addicted to saving more and more. Then I started automatically putting more money into retirement and bank savings accounts. I never saw the money that I was saving and got used to living on a smaller amount of money. When I checked my retirement and savings account I was shocked. I felt like I had no money each month but that was because I was saving so much of it! Thanks for the post!

  174. Jeanbe says 28 July 2015 at 20:34

    Each paycheck $100 goes right to savings. Should I need a “loan” from savings of say $200 to cover an expense on the next paycheck I up the savings by paying in on the next paycheck of $220.

    So whatever I take out of savings to pay bills gets a penalty payment of an extra $20.

  175. Jerome says 29 July 2015 at 00:20

    We used 1, 2, 4 and 5 and retired 8 years ago when I was 41 and my wife 37. For us, living from one 1 income was the most efficient way of saving. Just put one income into an investment account and live from the other. The biggest benefit from this method for us was that we avoided most of the budgeting chore. As long as you manage to live on the one income it doesn’t matter whether you bought something stupid, spend too much on gadgets etc.
    And I think you actually missed one method: if you have a windfall (like a bonus at work), put that money into the investment account as soon as you have it. I would usually also invest it directly to build in a second level of difficulty of taking the money out again.

  176. lmoot says 29 July 2015 at 04:33

    I try to send the same exact amount each paycheck, to engrain the behaviour. I treat it like a bill I have to pay. I just find it easier to send a steady amount vs. throwing “extra money” at it, and easier to predict when I’ll reach my goals. If I find that I have a surplus of cash in checking, or extra income, I’ll raise the amount, or make one lump payment when I get a good amount collected…usually as a final “push” to complete a savings goal.
    I started saving 25%, then 50%, now I’m at about 60%; the goal is to save 75% of my net income and only live on 1/4 of my income.

    Right now speed of saving is more important to me than how much I accumulate. If I make a decision to do something…whether it’s a trip or a DP on a rental property, I want to be able to open and complete a fund for that purpose by 6 months or less. You don’t always know a year ahead of time or whatever, that you want to do something.

  177. Linda Vergon says 29 July 2015 at 16:05

    (This comment came from Caitlin, a reader of our daily newsletter.)

    Thanks for this post! Always good to revisit this concept.

    One way I have found that works for me is to consider savings as “Another Bill To Pay” and automate/debit that amount no questions asked. That is the first step! It creates a psychological kick to make room in my budget. Then the “How to Afford That Bill” habit actually becomes easier….in all the myriad ways that you make yourself do it….

  178. Donna Freedman says 29 July 2015 at 18:28

    Each time my partner and I do a load of wash we put $2 into a jar. Although we don’t generate a lot of laundry, it adds up surprisingly fast — and you don’t miss the $2.

    On the other hand, my daughter and son-in-law do a lot of laundry (health issues). They put in $2.50 per load and in about 11 months they’ve ratcheted up the account to $275.

    In their case (and ours) the money is earmarked for a replacement washer when the old ones give up. But you could just as easily put the money into your savings.

    Or substitute another habit, e.g.:
    “Every time I fill this Thermos with coffee/tea and carry it to work vs. stopping along the way, I will put at least $1 in the jar.”
    “Every time I decide *not* to pick up a pizza on the way home but instead go home and heat up leftovers, I will put at least $5 in the jar.”
    “Every time I have a couple of friends over instead of meeting them at a restaurant/club, I will put at least $10 in the jar.”

    Substitute your own budget-buster/favorite temptation, and save away!

  179. Jess says 09 October 2015 at 13:36

    I do most of these things. I have a side gig. I’m a teacher, but I tutor 1 afternoon a week. It’s not a lot of money, but over the year it adds up. I have an automatic payment set up so money goes into our savings accounts every week. If there is extra to be saved I transfer it manually. I know about it in advance because it will show up on my budget. We take in exchange students, which is not only a wonderful experience for us and my stepson, but a good way to earn some money. That extra (minus money for their food, etc) goes onto the principle of the mortgage and savings in equal parts. We are currently working towards living on one income, with my income entirely going onto the mortgage and savings. We are both enrolled in our govenments retirement savings plan. Myself, my employer, and the government contribute 5% of my income, while my husbands employer contributes more than legally required, so all up he is having around 10% of his income contributed to his retirement.

  180. Karen Beale says 19 January 2016 at 00:41

    Nice post….The best use for extra money is whatever will bring you the most utility/happiness. That might mean paying back creditors. That might mean saving it. That might mean spending it. That might mean giving it away. But saying that it must go toward debt, if you have debt, and investments otherwise seems to go against what the basic idea that money is a tool for you to get more out of life. Money is for man, not man for money.

  181. Matt (Semper Fi) says 26 August 2016 at 18:53

    What a great article! I hope it sets non-saving readers onto a path of savings. That being said, I am a bit leery of paying myself “first”. This may sound like splitting hairs, but I feel that if you pay yourself first, you are setting a ceiling on how much you are going to save. What if, instead, you watched every single dollar like a hawk, curbed spending habits for a month, and basically avoided consumerism for a short time? When my wife and I did this, we found that we had over 50% of our take-home pay left at the end of the month! Before, we were plodding along at paying ourselves first with 10%, and then spreading the rest of our pay throughout the budget on both needs and wants. Again, probably splitting hairs to some people, but it made a PROFOUND difference in our lives. At this point, we are now saving over 60% of our take home pay, and feeling extremely satisfied.

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