Pay yourself first!

Our country is sitting on a fiscal cliff that can be devastating if you happen to be one of the people that get pushed over the edge.  We as an American society have gone from a cash based purchasing system to a credit based system in just over 40 years.  The amount of debt the average American has hanging over their head is astronomical.  A report issued just today shows the average family has $0 in savings.  So how can we change that?  Well, for starters you can begin to pay yourself first.

One thing we American's are good at is living up to our income.  By that I mean that no matter what our income is, we always manage to make ends meet.  Most people have no clue where they spend their money each payday.  They wonder why they are broke and in debt.  One reason is we have shifted into a instant gratification society thanks in large part to credit cards.  It's easy to charge it and fool ourselves into thinking we will pay it off when the bill comes, which of course generally never happens.  So what do we do about this?

The first step is knowing what you spend.  Make a log and write down every single penny you spend for an entire week.  Even if you drop a quarter into a gumball machine, write it down.  At the end of the week, look at what was spent and what was it spent on.  Chances are there will be several things on that list that you really didn't need to purchase.  You justified it, just like the morning cup of Starbucks or Dunkin Donuts coffee.  But you really didn't NEED it.  So take those type of purchases and add them up.  That is the amount of money you just blew for that week.

Now suppose you cut those things from your weekly routine.   Let's just say one cup of coffee per day.  Instead of buying the coffee you make it at home.  The cost is pennies per cup.  An average cup of coffee coffee from Starbucks or Dunkin Donuts will cost you about $5.  For a 5 day work week you would save $25.  Doesn't sound like much does it?  But in 4 weeks that $100.  In one year that is $1,200!  If you put that money into a money market at, let's say .85%, at the end of the year you would have $1.205.54.  In 5 years you would have $6,131.45.  And that is just from cutting out the $5 cup of coffee.  Imagine if you could do $50 per week in savings.  In one year you would have $2,411.08 and in 5 years $12,262.90.  Now I don't know about you, but $12,262.90 is just about enough cash to buy a brand new car!

So, once you find areas to cut back spending, you can begin to pay yourself first.  And what do I mean by that?  Well, remember what I said earlier about living up to our income?  If we can automatically move $50 a week into a money market account, we will never see that money.  We will adjust our spending habits to cover the loss of that money.  What you want to do is to be able to put at least 10% of your paycheck into one of these accounts before anything else is paid.  If you want to achieve financial freedom, then you MUST do this.  If there is one thing self made millionaires have in common, this would be it.

Really be honest with yourself and do a complete budget for your home.  Write down what is a necessity (mortgage/rent, utilities, insurance, car payment, etc.).  Then add about 10% to that number to account for swings in purchases such as groceries.  now subtract that from your monthly take home pay.  Divide the remaining number in half, and direct one half to an interest bearing account or money market.  The other half is for discretionary spending.  If you have bills that fluctuate (i.e. utilities) or that come in quarterly payments (i.e. insurance), do the math and figure out what it would be if broken down to a monthly payment/average.  Work to be able to set up another account where you can transfer that amount to this account.  now when those quarterly bills come due, or the high winter gas bill you have the cash to pay it and it won't break the bank.

There are other ways to do this, but this is the method I use.  I have been able to live comfortably and at the same time save about 6 months worth of salary.  Everyone has something they can cut back on.  Make the choice to change your habits.  Don't let the banks own you.  The less debt you have, the more power you have!