Many of you are familiar with the concept of paying yourself first. For those who may not be familiar, the traditional definition of paying yourself first is the idea that of all the bills that you are required to pay every month, the FIRST “bill” you should pay is to yourself. In other words, you put money in your savings account or retirement plan (or both!) before you do anything else with your money every month.
There are a lot of bloggers and financial writers out there who talk about living on half or less of their income. In other words, these folks have a tremendous ability to pay themselves first, right? I mean, if you can get by with your expenses totalling half or less of your income, that’s pretty much my definition of being a financial rock star. For a long time I was in awe of folks out there who live on half or less of their income. Seriously, in awe. I would think to myself, how can they do that? They must not have any debt. Must be nice!
I would absolutely love to be the person that has no debt and is able to just throw half of every paycheck into whatever investments my little heart desires. But my hubby and I have kind of a lot of student loan debt, and a mortgage to pay. For a long time I thought that we would probably not be able to live on a percentage of our income until we got rid of our debt. I thought we would never be able to “pay ourselves” very much until we kicked our creditors to the curb. After all, right now we pay extra toward our debt every month- if we were not putting extra toward our debt repayment we could “pay ourselves” more (or so we thought).
Then one day I read an article by another writer about how she was living on much less than her stated income and it dawned on as I read the description of how she did it that she was counting her extra debt repayment as part of paying herself first- not as a regular expense. It makes sense when you think about it. Your debt is, after all, on your balance sheet, and paying it down DOES in fact improve your financial situation. Your net worth increases whether you are increasing your asset column or decreasing your debt/liability column. Even though the check is made out to your credit card company, student loan company, mortgage company, etc., technically when you pay down your debt you are “paying yourself” by improving your own bottom line. However, this really only holds true as long as you are in debt repayment mode and you are avoiding taking on new debt. Because if you accumulate debt as fast as you pay it off, then you really aren’t going to be making much progress, are you?? And you really aren’t going to be paying yourself anything or doing yourself any favors whatsoever if you are continuing to accumulate debt!
Right now my hubby and I pay ourselves first in a few different ways. Both of us have money automatically withdrawn from our paychecks and deposited into our retirement accounts every time we get paid. We also pull a little bit of money into a savings account that we are currently using to fund expenses for our upcoming adoption. AND we are sending a small extra amount of money to the student loan companies every time we get paid. In true pay-yourself-first style, all of these things come out immediately after we get paid so there is no temptation to not do it.
Thinking of extra debt repayments as payments to us actually makes me much happier to be sending out extra payments to the student loan companies every two weeks when the hubby and I get paid. Sure, I’d rather be spending it on a trip to Aruba instead of debt repayment, but for right now I am satisfied with the idea that every time we send an extra payment to our debt that we are actually improving our bottom line, or our net worth.
This same thing could be done with any debt, and as long as you are not continuing to accumulate debt at the same time you will be improving your balance sheet, or your net worth. You can often automate the process through online banking to make it easy. Heck, there are probably some of you reading this that are paying yourselves first in several different ways and did not even realize it!
What do you think? Do you think that considering extra debt repayments as part of “paying yourself first” is cheating- or a valid consideration? Thinking of it this way, how many ways do you pay yourself first?
Suggested Reading: One of my favorite financial authors who inspired me to “pay myself first” is David Bach, and my favorite book of his is The Automatic Millionaire. This one is definitely worth a read if you are looking for simple but effective ways to improve your finances.
P.S. If you liked this post, you might enjoy using our free Net Worth Calculation Template. Sign up now to receive each new post delivered to your inbox, and we will email you the template! Sign up here.
This post first appeared on VOSA.com on March 13, 2014. Republished January 5, 2015.