“Pay Yourself First”
You’ve probably heard this personal finance cliche: pay yourself first. Essentially, this means you take your income and put it toward your basic living necessities first, then automatically save the rest or put it toward your financial goals, like getting out of debt. The idea is that if you “pay yourself first,” you don’t give yourself a chance to blow your money on other stuff.
Here’s how one reader put it:
This is absolutely true. For a long time, I heard this advice and thought, “yeah, yeah, just another money cliche that doesn’t mean anything when you’re broke.” But like most personal finance advice, it’s actually even more crucial when you’re broke. I think it was the last thing Wittyname said that finally got me to take this advice:
You will not notice that money missing but at the end of the year you’ll now have a separate savings account with $960 in it. And you will notice that!
After college, I had a student loan to contend with and a job that didn’t pay very well. My parents suggested I “pay myself first” and save $25 a week. I didn’t think $25 would make much of a difference because I was broke, but I figured it was a small price to pay to get them to stop hassling me about it. So I set up an automating savings transfer every week. I completely forgot about this transaction, and a few months later, I was surprised to see $300 in my account. When you’re broke, $300 is a very substantial amount. It jumpstarted my motivation, so I decided to boost my goal and save as much as possible every week. It didn’t take me a crazy long time to learn this lesson, but man, it was a powerful one that changed everything when I decided to finally embrace it.
An Emergency Fund = Power
Speaking of power, emergency funds are pretty damn empowering. When I first read about the concept in Dave Ramsey’s Total Money Makeover, I thought it sounded corny. I also thought, “how the hell am I going to have an ‘emergency fund’ when I can’t even afford to move out of my mom’s house?”
I always thought of the concept as a responsible, grown-up thing to do, but as one reader explained, I was approaching it all wrong:
It’s true. When you don’t have a cushion and you run into an emergency, you make desperate, dumb decisions. In the book Scarcity: Why Having Too Little Means So Much, researchers Sendhil Mullainathan and Eldar Shafir found that not having enough of a resource, particularly money, can actually make us less polite, more impulsive, and even lower our cognitive abilities. We get tunnel vision, the researchers write, and we can’t step back and assess our situation objectively. That’s when people take out payday loans or put everything on a credit card and hope for the best. It’s hard to take a step back and look at the big picture when you’re vulnerable, but that’s precisely what an emergency fund is for: to get you out of that tunnel.
A 401(k) Match Is Like Free Money
I still lament this one. If you’re not familiar with an employer 401(k) match, it’s time, especially if your employer offers one. It’s basically a company perk in which your employer matches a certain amount of your own retirement savings. A common scenario is a 50% match of your own contribution, for up to 6% of your gross salary. If you earn $50,000 a year, that means you could get $1,500 in “free” money from your employer!
There are some caveats to this. Most 401(k)s aren’t that great, and you generally want to just take the match, then invest in an IRA, which gives you more flexibility to choose cheaper and better funds. Still, the match is sort of like free money! It’s a great perk and, especially if you’re not paid much to begin with, you definitely want to take advantage of it.
This reader and I pretty much had the exact same experience:
I was lucky enough to work with colleagues who took the time to explain how awesome of a deal this was. Still, I was young and I had other plans for my money, so while I did take some advantage of the match, I still left thousands of dollars on the table. Don’t be like me. If your employer offers this match, do whatever you can to take them up on it (because ultimately, this money isn’t truly free: it’s part of your salary package).
Your Lender Wants You to Fail
One reader offered another really important lesson worth noting:
I think we all collectively learned this lesson after the housing crisis, and with the worsening student loan situation, it’s worth pointing out that this doesn’t apply just to mortgages: it’s the same for student loans, auto loans, business loans, personal loans, etc. While there are some loans (like hardship loans from credit unions) that have better terms and are designed to help people get back on their feet, lenders make money from interest.
I learned this the hard way when I tried to pay off my principal balance early, and my student loan servicer applied it to my future interest instead. This is a sneaky move. Instead of reducing your principal so you save money on interest over time, they keep your payment schedule as-is and apply your extra money in a way that maximizes their own profits.
It took me months of extra payments to figure out this was happening. When I finally did, the lender applied these payments correctly, but it’s a good reminder that you might need to act defensively when it comes to your loan. Your lender is not on your side.
One final lesson we could probably all stand to learn: it’s not worth dwelling on your mistakes. A study published in the Journal of Consumer Psychology suggests that focusing on your past mistakes can actually affect your present habits, and not in a good way. The study concluded:
…recalling failures does little to enhance self-control, despite conventional wisdom that one learns from their past mistakes. In fact, our results instead argue that focusing on one’s past mistakes may doom us to repeat them.
As tempting as it is to look back and rue the past, the best thing you can do is share the lessons you’ve learned and try not to kick yourself too hard—your present financial health depends on it.