Always Pay Yourself First

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What Does Pay Yourself First Actually Mean?

Pay yourself First is a concept that we’ve all heard before but have you ever stopped to think about it?  I remember my parents teaching me this simple concept as a preteen.  When you get birthday money, you deposit some of it in savings before spending the rest.  This way you don’t blow all of your money in once place.  Fast forward a decade or more and my paycheck is deposited in my checking account.  Uncle Sam was paid first, then my healthcare coverage, and finally I get what’s left over.  I then pay my monthly bills and debt payments if I had any.  Finally at the end of the month I transfer what’s left to savings.  I did this for quite some time before realizing that I was not following this simple logic.  Paying yourself first ensures that you hit your savings goals before you buy a latte or go to a movie.

What Are Your Savings Goals?

Now if you are still in debt it’s possible that you don’t really have any savings goals.  I’m not going to debate whether you should save and payoff debt at the same time in this article.  For those of us without debt, here’s a question for you:  what are your savings goals?  Are you saving up for a new to you car?  A new laptop?  What about bigger goals such as vacations?  Or perhaps your biggest goal?  Retirement and/or financial independence.  I will tell you right now that if you don’t have a goal, you will never achieve it.  First you need to set the goal and then figure out what it takes to achieve it.  Perhaps it’s to increase your net worth by 5%.  What would that require?

Automate That Goal

Once you have your goals locked down, automate them.  If your investment account drafts the amount you need to save each month, you will hit the goal.  It’s really as simple as that.  Say you want to save up for a replacement car and you need $250 per month in order to afford one in a few years.  The simplest way to achieve that is to have it deducted from your account just like a car payment.  Then if you spend every dime of your paycheck, you car fund is still getting it’s share.

Mindset Matters

While I find that many things when it comes to money are related to the heart, some of it is still in your mind.  For some reason if you can afford something then you tend to buy it.  So if I had an extra $250 in checking, I might treat the Mrs to a nice night out spending in excess of $100.  She certainly deserves one after putting up with me.  If instead that $250 was in the car fund, I would be far more likely to cook her a nice dinner at home.  Either way our bellies are full but in the pay yourself first example, so is our savings goal.

 

Should I Invest More Or Pay Down My Mortgage?

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Invest More or Pay Extra on the Mortgage?

Say you have an extra $50 each month is it smarter to pay extra on your mortgage or invest it?  This question is more complicated than it seems.  The reason why is because your own personal values will influence your decision.

Why You Should Never Pay Off Your Home

Some experts say that you should never pay off your home.  Why on Earth would that make sense?  Here’s why:  Years ago, home values increased over time and paying 30k for a house resulted in a 100k house in a few decades.  So one way to look at it is that your 30k grew to 100k.  Now this leaves out mortgage interest, home repairs, etc but that used to be how the market worked.  Today, we have lower interest rates and home values in many areas do not increase much at all.  I know that my home according to Zillow has dropped in value by $1500 in the last year.  I’m also paying about 4% interest on the Mortgage.  Not exactly a wise investment.  In fact, some such as Robert Kiyosaki claim that a home is a liability not an asset at all because assets produce monthly income.

Why You Should Race To Pay Off Your Home

If the house isn’t increasing in value, then why would you be in a hurry to pay it off?  Interest is one reason and the other is to get rid of that feeling in the pit of your stomach.  Yeah I said it, feelings have some bearing on your money.  One of a homeowner’s fears is loss of ownership.  That essentially goes away once you make the last payment.  This of course is what anti-debt Dave Ramsey advocates.  He says the grass feels different when the house is paid for in full.

Who Has The Right Idea?

So now that we understand the two sides, what about investing instead of paying down the mortgage?  Well, of course investing is not guaranteed and your house interest is but your home value is not guaranteed either.  Here’s what I know:  My house interest is guaranteed to be a 4% cost and my portfolio has earned 14% this year in this overzealous market.  So for this year alone, it makes no sense to pay extra on the house.  In an opposite year, the opposite might be true.

The Truth

The fact is that there is no right or wrong here.  All I can tell you is that if your house stays the same value for the next 30 years, you have effectively earned nothing on your investment.  If the market falls the next 30 years then you are throwing money away by investing in the market.  History says that over time the market always rises.  My extra money is going towards investments.  What are you going to do with yours?

 

Edit:  Not long after posting this article I was contacted by a representative of Zillow thanking me for mentioning them and asking if I could add a link for my readers.  Since I was asked so nicely here you go:  www.zillow.com

Now Is The Time To Plan For Next Year

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It may seem too early but now that we are only a few weeks from the new year you should start planning now.  Especially if you still have holiday shopping to do.  Either way, if you start a plan for the new year now you will have a well thought out plan ready to implement while others are just thinking about their resolutions.

Earlier this year I watched a few videos of Jim Rohn on You Tube.  If you’ve not heard of him, I highly recommend you look him up.  Anyhow, he believes that reflection is very important and recommends doing it weekly, monthly and yearly.

It’s perfectly fine if you are already on a great plan and just want to continue following it.  What I want you to do though is reflect on your current plan.  What is working well, what is not working at all.  Are there any changes that could be made?

Now is also a great time to make donations to your favorite charity if you have neglected them or do so because it impacts your taxes.  It’s also a great time to start that holiday savings account for next year because once again this time of year sneaked up on you.

Lastly, I just want to say thank you to all of my readers.  You can expect more great content ahead as I reflect and plan for next year.