Sunday, January 18, 2015

Okay, let's get down to business

Okay, you've been reading along so far (thanks!) and you might be thinking: "Okay, Money Dummy, I know that debt is bad. I know I should be saving. But what the heck should I do, and how to I do it?" So that's what today's topic is about: what do you do?

The answer is: Pay Yourself First.

Okay, that's the short answer. Now, here's the longer answer.  When you make a move to get ahead with your money, you're paying yourself. And that payment is more important than all the other bills you have each month*. So each month, when you're divvying up your money to pay rent or mortgage, insurance, food, and so on, add to those the amount you're going to pay yourself.  And to make sure that it actually happens, automate it any way you can so you don't forget. Remember what I said in my last post, about how our brains aren't hard-wired to think about money? Your brain will remind you about all kinds of things you need and want every day, from paying the electric bill (there's the envelope on the desk in front of you) to going out to dinner with your friends (that text flashing on your phone, also in front of you). Your brain knows you need light, food and companionship. But it won't remind you of your retirement. As far as your brain goes, you'll work until you drop dead at the age of 46, no 401(k) necessary.

The first think you're going to do is figure out how much money you can devote to this worthy task. Let's say in this case you're going to save $100 a month.

Okay, so in what ways can you pay yourself?  I'm just going to give you one example right now, which is just having an emergency fund of $1000. I won't tell you why you need one; everyone else has told you that. You want to have one, you just can't ever seem to save money. Here's how you do it:

Option 1: If your employer has direct deposit
1. Go to the bank and open two accounts; a checking account and a savings account**
2. The bank will give you three important numbers: your checking account number, your savings account number, and the bank's routing number.
3. Go to your employer and get a direct deposit form (this is usually done online now)
4. On the form, have $100 direct deposited to your savings account and the remainder to checking. You'll need the three numbers to do this.
5. Forget that you ever did this.

Option 2: If you don't have access to direct deposit
1. Do the same as steps 1 and 2 above
2. Get a login to the bank's online site
3. Go to the bank's transfer page. Every bank has a page that lets you schedule regular transfers.
4. Set up an automatic transfer of $100 once a month, on the day you get paid.
5. Forget that you ever did this.

After ten months, surprise!!! You've saved a thousand bucks. That's a good emergency fund.

What you shouldn't do, and what I did for most of my adult life, is to intend to save that money after you've paid your bills. Here's what always seems to happen:
  • You get paid.
  • You pay the rent or mortgage, insurance, electric bill, etc.
  • You go to the grocery store
  • You realize that the rest of your money has to last until the next payday, so you decide you'd better sit on it until the end of the month, just in case
  • The end of the month comes, and you have $11.76 in your checking account. Good thing you get paid tomorrow!
 So in this case, you just never, ever get ahead. No matter how much money you make or how little you spend, you are always living from paycheck to paycheck.

 Since you've read this far, I'm going to give credit where credit is due. I learned this technique about eight years ago from a guy named David Bach. He wrote a book that my mom gave me as a gift called The Automatic Millionaire; there's the link so if you're the book buying type you can check it out.

*I guess I should point out that this doesn't mean you should pay yourself instead of your other bills.
**You already know this, but if you already have these, then you can skip this step. Same goes with the others.

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