A friend of mine recently went through some personal finance courses due to financial difficulties she was having. We were talking about the classes she took and she told me she had learned a lot and was happy to have gone through them. She surprised me with a comment. She told me the one thing the classes taught her that she didn’t agree with was the “paying yourself first” concept. I was surprised; I figured if the classes covered anything, this would be one of the obvious things to cover!
Paying yourself first is when you take a percentage of your income and put it in your savings account or other designated account before you start paying your other bills. This is also referred to your “emergency fund” since it is only to be used in emergencies. It is important this account is actually only used for emergencies. Using a little here and a little there each month when you run short on spending cash does not constitute an emergency. A shopping spree is not an emergency. Having car trouble which will not allow you to get to work is. These are the types of things an emergency fund is used for.
My friend did not agree with this. She felt that she needed to get all her bills paid and then if she had anything to save then she would save it. If she didn’t have anything to save, well, she wouldn’t be saving.
This is the kind of behavior that causes financial problems in the first place. By paying yourself first, you are giving yourself a fund to draw from when emergencies come up. If you are trying to pay down your credit card debt, and you have no emergency fund, you will continue to rely on your credit card. This will counteract any payments you make and will continue you on the cycle of debt.
If you like me, any debt you incur, you most likely want to pay it off ASAP. While I’m certainly not advocating carrying a ton of debt, you have to be realistic with how quickly you can pay off your debt. If you are paying your normal monthly bills such as housing, utilities, transportation etc. and then putting all your leftover money towards debt, with no savings, you aren’t doing yourself a favor. It never fails, something comes up and you need money to pay an insurance deductible or pay a doctor bill. Then you are back in the cycle of using your credit cards to try to stay afloat.
The rule of thumb is putting 5-10% of your income towards paying off debt. If you would like to increase that percentage, you can either earn extra income or cut out some unnecessary spending in your budget. I use the word unnecessary here because there are certain things we have that are not required to live. For example, you need a food, clothing and shelter to survive. But you do not need cable TV with all the premium channels to live. You may think you do, but I promise you, you don’t!
There are several things you can do to bring in extra cash to help pay down debt. Can you work more hours at your current job to bring in some extra cash each month? What about selling some things like clothing or electronics on craigslist or eBay or using money-saving eBay coupons? Babysitting for friends and family members can also help bring in extra cash. Start getting creative with your skills and see where it can take you.
If you are looking for ways to cut spending out of your budget, check out my list of ideas here.
If you aren’t paying yourself first, try putting $20 aside for emergencies with your next paycheck. Work towards increasing this over time until you have an emergency fund with $1,000. The practice of paying yourself first is the foundation for building an emergency fund that will help break the debt cycle.