Pay yourself first

How can you feel good about paying yourself first, if it means telling someone else “No?”

We’re all taught to pay our debts on time, so it’s quite natural to feel guilty about squirrelling away even a few dollars when creditors are hounding you.  It feels like you’re hiding the money.  It feels dishonest!  Let me assure you it’s not; it’s called planning and one day your creditors will thank you for it.

Let’s say you’ve made a budget, you’ve looked through your past monthly expenses, you tighten your belt and commit to a reduced spending plan.  What’s left (if you have any left) you will spread among your creditors to pay down debt.  Now you and I both know your budget is going to fail, just like it did last time.  So where did you go wrong?

You budgeted for expected expenses, but forgot the unexpected expenses.  If you always expect the unexpected and budget a regular amount for emergencies you will greatly reduce the chance of crashing your budget.  The easy way to do this is to have us withdraw a set amount from every paycheck to deposit in your contingency savings account.  Now it’s there if you really need it.

But your next objective is to build up an excess in this account.  Having an excess gives you flexibility; it puts you in control.  Set a goal to use that excess to eliminate one debt entirely.  Spreading a fixed amount among fewer creditors means a bigger piece of the pie for everyone.  It’s tempting to pay off your smallest debt first and I would agree if you can pay it off in 60 days.  There’s pressure to pay off the creditor who calls you the most (the squeaky wheel), but unless there’s an immanent threat of escalation to legal action, just assure them this is the best you can do this month.  Maybe you owe money to your parents.  If so the damage has already been done, but the good news is you have longer to repair that damage.  Unlike your other creditors they will be most happy when you can tell them you’re completely out of debt, so pay them when you can deliver it with good news.

Instead, look for a debt that has a high interest rate, late charges or other fees that add to your cost every month and set a goal to pay that one off first.  Then move the excess from your contingency savings to a SmartySavings account labeled “for debt.”  In 60 days try to move more excess to your “for debt” account.  Since things change you need to reevaluate your choice and if it still makes sense, take 90% of the “for debt” balance to pay down this debt.   Commit to repeating this until this debt is paid off.  You’ll be surprised how much easier it is pay off the next one.

If building an excess appears impossible, seek advice and if necessary make a plan to negotiate with creditors or consider a debt consolidation planNegotiating the amount of debt may be the best solution for you and your creditors alike, but remember that doesn’t mean they won’t ding your credit rating.

No matter how much you make, if you pay yourself last, you’ll always be broke.