This post continues the series on Mind the Finances, as a necessary step to creating a life of effortless abundance.
We will now cover the topic of paying ourselves first.
This begins with putting aside funding for the inevitable emergencies in life. The rule-of-thumb is to have 3-6 months of our take-home pay tucked away and available for immediate access. Since we’ll want this money guaranteed to be available, the best place to keep it is in a savings account that is not touched until / unless there is an absolute emergency. Becoming twitterpated over a bright, shiny new object does NOT qualify 🙂
Examples of what does qualify, for the use of our emergency funds, would be paying for normal living expenses during a (temporary / short) period of job loss, disability and/or an unanticipated bill (auto repair, healthcare expense). An emergency fund let’s us absorb the “majority” of these situations without compromising our long-term financial plan, including having to take on debt or selling assets at a discount, when under duress.
If we should have to consume some or all of our emergency fund the first priority is to then replenish this as quickly as possible.
Once we’ve established our emergency fund we can now begin putting money away for the longer-term. The goal is to save “at least” 10% of everything we earn. The higher we can make this percentage the sooner we will become financially independent. When we get started we may only be able to put away 5% because of other obligations we’ve made for our income (living expenses, debt payoff, etc.). Several months later we may receive a raise. When this happens we have a couple of choices:
- Immediate gratification, which could increase our ongoing financial obligations (thus consuming the raise)
- Shortening the timeline to our financial independence
At this point it may be time to reward ourselves. And, this is encouraged. However, if we do so, let’s try to avoid increasing our ongoing obligations, thus consuming the increased income, we have worked so hard to earn. Instead, we can decide to splurge on something “with cash” (e.g., a new toy, vacation, etc.), then use the increased funding on an ongoing basis to accelerate the payoff of debt and increase the amount we save for the long-term. The result, we are shortening the timeline to our financial independence.
By consistently taking this approach, while balancing the realities in life (yes, there will be times when we’ll want to increase the obligations for our income to move into a larger home as our family expands, etc.) we can absolutely achieve financial independence WAY BEFORE normal retirement age.
The alternative, which many in our society take, is that of paying expenses first and then saving / investing anything that “may” be left over. Taking this approach, quite simply, continuously delays (if not prevents) the realization of our goal of becoming financially independent.
Finally, if all we do is store-up extra funds for ourselves we are stopping the flow in the universe. Consider the Dead Sea. Know why it is dead? While the Jordan River is the source of water in, there are no outlets. The water is stagnant and cannot support life. Not the result we want from our finances 🙂
As such, do not forget to contribute to worthy causes. This could be giving at your place of worship and/or funding a cause that will make a real difference in the world. Have you ever given a SIGNIFICANT tip to a waitress who you just learned is a single mother, struggling to get by? I don’t mean 20% vs. the customary 15%. What about slipping her a $100 bill, on a $25 lunch? Trust me, the transaction is just as good for you as it is for the recipient. You, your significant other, the recipient and their family will remember it for years – and feel really good about it!
In closing, paying ourselves first does not suggest that we should be stingy with our money. Far from it!
It means consciously directing our income towards paths that will improve the quality of life for ourselves, our family and others, prior to it being consumed by frivolous expenses that have little, if any, long-term value.
More to come!