Pay Yourself First
We are now going to dig into the almighty savings section, and really talking about how to save, even when it feels pointless. So what we're gonna go through in this segment is starting off with the importance of paying yourself first and what that means. Getting into why you need an emergency fund. We had an emergency fund question back in the last segment and this idea of how much do I need? My situation is X, Y, Z, and how to make sure that you're tailoring it to your unique situation. And also why they're just important to have in the first place. Then techniques to trick yourself into saving. This is one of my favorite parts of this conversation because we really do dig into how to play mind games with yourself, how to make sure that you're encouraging yourself to save, you are putting systems into place to make sure that it happens and that you're not maybe robbing your future self for the pleasure of today's you. And then how to save, especially when you feel strapped for cash. ...
So no matter what your financial situation is right now, we're gonna talk through some options and opportunities for how you can actually start to put some money away. And then ultimately this idea that really this all comes down to building the habit, and that is part of what is so important about saving. But first, pay yourself first. This is really one of the biggest cliches of financial advice. You'll hear people tout it all the time. You have to pay yourself first. But sometimes we don't necessarily know what that means. So really all it is is this notion that every time you get paid, whether it's with an employer, whether it's through a client because you're self-employed, you're putting money immediately into savings. Now for people that have a traditional paycheck this can be a really easy thing to set up. You can just go to HR or the payroll department and say, hey, I want this percentage of my paycheck going directly into this savings account. So you automatically, before it even hits your checking account putting money away into savings. Now when you're self-employed that can be a little bit more tricky because there's you in between that paycheck and it actually getting to your savings account. So you have to be a little bit more diligent about making sure it either gets routed to savings or setting up an automation knowing very well that at this day of every month, this percent is going to be moved into savings, and if it's not there, you're gonna get hit with an overdraft charge. But I do really want you to set up first with this idea that it is important every single time you get paid to put a little bit of money into savings, and think about it as paying yourself. And part of why savings is important is because one, it proves that you have an understanding and a control over your cash flow. This is an important part of the entire budgeting financial health experience. You have to be putting money aside for the future. It also makes sure that you have a detailed understanding of what's coming in, what's going out, because personally I like to consider some of the, quote, going out, is money that's going into savings, so then what's left over that you have in the month isn't money that you're thinking, well hey, if I have some left over at the end of the month, I'll put it into savings. Because a lot of us have justified that way at some point in our lives. Just, you know, I'm not gonna save it right now but if I have a little bit of money left at the end, which how often do we actually have that money? Very rarely. I don't want you to think that that's when you're gonna save it. I want that to be action number one. And that money needs to be in an actual savings account. Well let's dig in first about why you need an emergency fund. This is really a foundational part of any savings conversation, especially when we're talking about getting our financial lives together. Murphy's Law is real. Things are definitely gonna go wrong at some point, and I think that that's such a huge part of why you want an emergency savings fund, even if you have debt, and we'll dig into that very shortly. But bad streaks are gonna happen. A tire is gonna blow out on your car, your dog's gonna get into a bag of brownie mix and need to get rushed to the vet, your kid's gonna fall down and hurt himself. Things are gonna happen that weren't in the budget. And if you don't have an emergency savings fund in place, how is that emergency going to get paid for? Probably going to get financed on a credit card, which is just going to perpetuate a debt cycle. Particularly if you're already in one. Now the classic advice for emergency savings that you're generally gonna hear is that you wanna have three to six months of living expenses. Now one thing we talked a little bit about in the budgeting section, that this doesn't need to be the lifestyle to which you're currently accustomed. This money needs to be what you need for just the bare essentials. So lights are on, food's on the table, childcare is handled, utilities are paid, all of your debts are paid, that sum of money is what I want you to think about when you're saving for emergency, not, I'm also still going out to eat and indulging in the other things that I enjoy. It's just your baseline needs. That makes it a little bit easier. And it comes into this idea of this bare bones number. So, again, it's not about your current lifestyle that you're living, it's about the base line things that you need in order to meet your basic needs month to month, that's the amount that you need in your emergency fund. And the reason I focus on this is because sometimes it can feel super stressful you need three to six months of living expenses saved, because you might actually be thinking in your head, I need three to six months of my full salary saved. And that can be a lot of money. So if it's just the bare minimum that you need, great. Now if you have a low-risk tolerance, you might want more, and that's totally fine, but I'm just saying, when you're starting out, this is the number you wanna focus on. Now what happens when you have debt? I would like you to consider having at least $1, minimum saved in emergency savings fund if it's just you. If you have any sort of dependent, and I don't just talk about kids, I actually include pets here because they get sick too and have emergencies that can really blow up your budget, I want you to have $1,500 set aside. Or if it makes you feel better, you could even have your child or pet have its own emergency savings fund so there's money that you're putting away in case something happens. But the reason that it is so important that even when you're in debt to have this stash of cash is because like I just mentioned, something is going to go wrong. If it's gonna take you a decade to get completely out of student loans and credit card debt, something's definitely gonna go wrong in those 10 years. It could be big, it could be small, but you don't want it to cause you to spiral into more debt because you had to finance it on a credit card. $1,000 often is just about enough of a buffer. It's just about enough that you need in order to make sure that a tire can get put back on that car, emergency surgery can happen on a pet, a co-payment can happen in order to get to a hospital. Now when you're debt-free, that's when you really wanna start to level up to be more in this classic three to six months worth of living expenses advise. That is really an ideal amount because what happens if you say, lose your job. It could take you a few more months to get a new one. Or if you're self-employed and you lose a major client, it can take a little bit of time to on-board somebody who's going to fill that income gap. So having an amount of money set aside to cover that shortfall is very helpful. Or if a major issue arises in your life, it could be medical related, it could be something that's just happening to you personally, that's when you need this stash of cash set aside. Another great strategy that I actually like people to think about is having the amount of your health insurance deductible put aside. This is not actually usually commonly talked about when we discuss emergency savings funds, but it's something that somebody mentioned to me once and I thought, that's actually a really smart idea, because a lot of times we can get ourselves into a situation where we need access to our medical insurance but we don't have enough to actually pay for the deductible, which can cause a debt spiral as well. It might have to get financed on a credit card. So if you're in a really comfortable financial situation, you're debt-free, you're able to start putting money into savings, that just might be an amount of money to tack onto what else you want saved for living expenses in emergency savings. Not saying it's a mandate, just something to consider. Now when you have variable income, the number that's about to come up is gonna feel a little stressful. Nine months of living expenses is what is really a goal. All I'm saying is it's a goal and it definitely takes time to get there. But the reason I'm tacking an extra three months on to the cliche advice is because everything is honestly more expensive when you're self-employed because you are your own boss. You are in charge of handling healthcare and taxes and savings, and sometimes you go through a streak of really lean months and it can be hard to feel like you're going to be seeing the other side of that financial situation, so it's great to pad your emergency savings fund to quite an excessive degree. This can also get played out in a couple of different ways. You could have money set aside that's just for your business. So maybe it's you only have three to six months for you personally, but you also have a stash of cash that is only earmarked for your business. So if you're having a lean time, you're able to still pay any employees or any vendors and make sure every part of your business is still able to function, even when you're going through a bit of a tough spot. I just, again, I know that this can feel really overwhelming when you're self-employed but because everything does tend to be a little bit more expensive, it's important to start kind of thinking about that. A key part of emergency savings is it needs to be liquid. Sometimes there are actually companies out there who do recommend you can invest some of your emergency savings. I'm gonna say probably not a great idea. The reason I say that is because this needs to be money you can easily access. So, plain vanilla savings account. Preferably getting at least 1% interest rate. We will dig all into that tomorrow when we talk about how to pick better financial products. I'm telling you right now, the goal is a minimum of 1% APY on your savings account that you're putting aside for your emergency savings. You also want this to be at the same bank where your main checking accounts are. I have mentioned earlier that I like to do this out of sight, out of mind technique with a lot of my savings, where I have most of my checking account money is at one bank, where my savings for things like maybe having a down payment on a home, saving for travel, things that are kind of more luxury savings goals are at a completely separate bank so that I'm not tempted to skim off the top. Now I advocate that you have your emergency fund at the same place as your checking accounts because if it's at a different bank it can take three to five business days to have that money transfer over, and if you need it right now, you need easy access. And that's why I'm saying, don't invest your emergency fund, even if it's a conservative investment, it can take a little bit of time to cash out, move the money over. Especially if it's invested in stocks and the market's not doing so hot, it could mean that you've actually lost money on the investment that you put in. So please make sure that you're putting your emergency savings in a plain, vanilla savings account somewhere.