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Pay yourself first

Dear Pete

I like reading financial advice articles, but I never really follow through on any of the advice I read. The problem is that I love spending money. My family didn’t have much money when I was growing up, and I was never able to get anything I wanted. I make a very nice living today, but I spend a tremendous amount of money. You only live once, and I don’t see the fun in not living life to its fullest. I see the logic in personal finance articles, but I never pull the trigger. How can I do what I know I should do, and still live the life I want to live?

Matt-San Diego

I know I’m supposed to write 800 words trying to convince you that you’re being shortsighted, Matt. I could just conjure up a metaphor about going on a 1,500-mile journey without a spare tire or something trite like that. I should tell you that you might end up back in your childhood’s financial reality if you don’t better manage the resources you’ve earned. And although making this personal finance article personal for you might shake you into following the advice you so willingly consume, yet reject with your inaction, I will spare you the violin music and provide you with actionable advice. What’s the point of more theory without actionable advice?

I’ll give you this, you’re appropriately self-aware. You’re not the first smart person with a good income to acknowledge your disregard for the uncertainly of the future. Your financial behavior struggles aren’t that different from my nutritional behavior battle. Sometimes I read fitness magazines during layovers at an airport bar while drinking a beer and eating a plate of nachos the size of a Shih Tzu. I justify it by wearing a Fitbit.

It seems to me you’re measuring fun by the amount of money you spend on your attempt to have fun. In other words, $10,000 worth of fun is better than $8,000 worth of fun. Based on this philosophy, you’re succeeding. I can’t argue with your assertion that behavior change seems superfluous.

Instead of trying to convince you to change a behavior with which you have no problem, I’m going to hit you with the most cliche personal finance advice of all time. But this time I need you to take the time to look past the obvious lesson and dig deeper into the meaning.

If you’re a seasoned personal finance reader, then you’re familiar with the phrase “pay yourself first.” My job clearly isn’t to teach you this phrase. You’ve heard it a million times. If you had a dollar for every time you’d heard the phrase, you’d spend it. But that’s beside the point. My job is to get you to understand why “paying yourself first” won’t cramp your style.

“Pay yourself first” is one of those age-old idioms that means both nothing and everything. Some people hear or read the phrase for the first time, and it’s life changing. For the rest of us, it’s no different than refusing to eat an apple a day. The phrase is meant to spur wealth accumulation. By not using a portion of your current income, you’re able to divert the funds to grow for use in the future. It’s pretty simple stuff.

There’s more to it than you think.

I’ve always felt “paying yourself first” or savings in general, for that matter, isn’t about accumulation. Sure, if you don’t consume your current income, and it grows off to the side, accumulation may occur. But the most important aspect of savings almost seems esoteric. Saving is really about proving you don’t need your entire current income. And it really doesn’t matter if your spending consists of both needs and wants, because once the income is consumed, you can’t convince me that you aren’t fully dependent on it. Saving is the process of breaking your dependency on your income.

Matt, you can try to split hairs between needs and wants, but the fact that you’re consuming your entire income leads me to believe that you are fully dependent on your entire income. You’re likely trying to make hay (save money) with what’s left over.

Buying what you need first quickly turns into buying what you want second, and then savings gets the bronze. It’s called the sweep method; it rarely works.

The sweep method is the idea that you can sweep the money you didn’t spend over to savings at the end of the month. If there happens to be any money left over, it gets swept over and accumulation can begin. I’ve certainly seen the sweep method work for very disciplined individuals who don’t have a consumption issue. But I’ve never seen the sweep method work for someone who is trying to change their habits. Paying yourself last does not create healthy new habits. If you’re looking for fresh new habits, as your email suggests, Matt, then you need structure. The amorphous nature of trying to sweep over an immeasurable, constantly changing amount of forgotten-about spending ammunition is fruitless.

Work smarter, not harder.

You need to schedule savings. The moment your employer pays you, money should flow right into savings. Doing this will decrease the amount of money you spend, the money will ideally accumulate over time, and you will prevent the impending financial disaster on your horizon. Then, spend whatever you want. Personally, I fund my financial priorities first with every pay check, then don’t feel a bit bad about blowing the rest on whatever I want. The only way you can spend money freely and achieve financial independence is to pay yourself first.

At your current pace, your financial life will fall off a cliff. You can’t possibly accumulate the amount of money you need to re-create an income stream once your work income ends. If your income consumption is still 100 percent at retirement age, you will feel the ugliest pings of failure you could ever possibly imagine. I’ve seen it happen. It’s awful.

Take action right now. Honor the cliche: Pay yourself first.