saving #2: pay yourself first

one of the things that financial people always stress about saving is to make sure you're saving diversely. while we all implicitly understand "diversity", especially if you went to my high school, not many of us understand what it means in the context of money. next week we'll cover diversifying your savings, but in order to diversify, you're going to need something to work with. this bring us to another principle financial people talk about, although not enough for my taste- saving systematically.

now that we know *where* to put our short term cash funds (you're all supposed to shout "high yield savings account!"), we need to know *how* to put it there, or in other words, where to get the cash for the stash. i used to think that the way to save money was to not spend any money, i.e. i'd get paid and then pay all my bills and then try and use as little as possible for the rest of the period and then if i had any money left over right before i got my next paycheck i'd stick that in my savings account. not only was this a very stressful system, because i was constantly trying not to spend any money, but it was pathetically ineffectual- for some odd reason, i never seemed to have any money left over. this brings me back to my first point about managing your money, and something i promise to beat like a dead horse because it is THE MOST IMPORTANT THING YOU CAN DO FOR YOURSELF, which is keeping track of your expenses. once you have a sense of what you spend things on, then you can see how much you can afford to save.

notice the odd phrasing of the above sentence- "afford to save." this is where i work some psychic voodoo on you for you to realize that all our (or at least my) ideas about savings were all backwards. instead of putting saving money as the last thing on our list, the thing we do when we've already spent it all, we need to move it up to the top of the list. hence the "pay yourself first" tag. when you start to create a budget for yourself, your savings amount should go right at the top with your rent, phone bill, etc- all your fixed expenses. and you should know how much you can afford to save each month because you've tracked your expenses and created a budget. why pay your landlord, zabar's, fairway, fresh direct,etc before you pay yourself? sure, it sounds a little hokey, but in all honestly, increasing your savings rate will afford you a host of options in the future:

1. the ability to live on less that you earn. this is a very important trait especially in the now volatile job market. if you ever get laid off unexpectedly, you won't need to hold out for the same salary you made at your previous employer (although, of course, you should try to) because you now know how to live on less. conversely, if you ever get a raise you can bank the whole increase and continue to live on what you earned previously. i'm still living on the first yearly salary i ever earned- which was about 4 years ago.

2. a larger pot of cash sooner for your emergency fund, your house, your new business, your round-the-world vacation. saving systematically allows you to see your money growing at a steady clip and plan for your future goals better. (omg i sound EXACTLY like my father. how did this happen??!!!)

3. money for retirement. okay, i know, we're only 1/3 of the way through our lives, and here i am blabbing about retirement. we don't even have kids yet! it does seem really weird to be worrying about this now, but the truth is that the sooner we start saving the more money we will have. this is due to the best of all the miracles: compounding interest. see: here, here, and here. also, most importantly, at this point in our lives we can borrow money to subsidize our dreams; you can get a loan for a house, a car, a new business, your kid's college, but no one is going to lend you money to rent out that villa in tahiti and isn't that so much better than spending your 75th winter in that 5th floor walk-up?

all savings accounts will offer you the option of automatically transferring money at any given point in the month. for example, i have my ING account withdraw $X dollars from my bank account every 15th and end of the month. this way, when i start spending my most recent paycheck, i don't have to worry about saving anymore; it was already done. even if you only put $5 into a high yield savings account every time you get your paycheck, you'll get in the habit of savings. and you'll get excited about watching your money grow. this might be bordering on obsessive, but every time i have a lousy day i always get excited at the prospect of checking my account balances because they've usually increased while i wasn't noticing. i can't think of another circumstance where something grows most fruitfully when you ignore it, but an automatic savings account is a rare gift.

one last note: if you are in the situation where you have some considerable debt and are waiting to save after you've paid down your debt, please don't wait. i know that the interest you're paying on that credit card will always be higher than anything you'll earn in a high-yield savings account, but still please don't wait. think about this: you've paid down that credit card and are now debt free, but still lack any emergency savings. unexpectedly, your wisdom teeth need to be pulled and because dental insurance is always bad, end up stuck with significant bill. without a cash cushion, you have no option but to use your credit card, landing you right back where you started. i know it sounds bleak, but it has happened to actual people, pretty often, and it such an emotional struggle to recover from. don't let it happen to you. you can save *and* pay down your debt. it is possible!

p.s. i'm sure you get it by now- i'll post this super cute picture hoping you think it pertains to this post in some way so that you'll read it. thanks for reading!
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