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Pay yourself first?

August 30th, 2006 at 06:21 pm

In researching the best way to eliminate all of my debt I came across a book titled the Automatic Millionaire by David Bach. It took me about two hours to read through this little gem over two days. This is a trick that I learned from an old friend. Instead of purchasing books, I just go to the local Barnes & Nobles or Borders and read during my lunch break. Now the money that I would've spent on this book will be put towards my outstanding debt.

A recurring theme in many of the books I have read, including the Rich Dad series, is that you should pay yourself first and invest that money for the future. Now I am struggling with wether or not to do this. After thinking about it for a while, I realized that I already do pay myself fist by contributing to the company 401K plan at work. Now I only contribute 5% a week but it is better than nothing. The big question with paying yourself first is this...

Are you getting a better return on your investments than the bank is getting on you? If your investments are giving you a 5% return and your credit cards are costing you 7%, wouldn't it be better to take as much money as you could possilbly scrape up and pay off those credit card bills as quickly as you can? You are actually losing 2% by paying yourself first!

Some experts may try to shoot this theory down but I can't see how. There are ways to cut your credit card interest rates so that they are less than that of your investments. For example, you can play the 0% credit card game. This is a tough game that I have lost in the past. I will attempt to get it going again once I feel comfortable enough about doing so. There are some good articles on www.debtsmart.com regarding this method.

I am not sure what to do about this. I am in a quandry (I love using that word! I don't really care if it is used incorrectly!) My gut says to stop contributing to the 401k and start hitting the credit card debt hard. This, however, goes against everything that I have been taught. Save, save, save, save! What to do? What to do?

7 Responses to “Pay yourself first?”

  1. ima saver Says:
    1156968658

    I would do both. One thing you can never recoup is how valuable it is to start saving early and let it compound over many years!

  2. chubrock Says:
    1156969866

    That's what I was thinking. I was just going to keep everything the way it is and start chopping the debt down like a redwood.

  3. LuckyRobin Says:
    1156975150

    I would not quit the 401K, simply because it is pretaxed income. Who knows how much of it you would end up with after taxes? Enough to make a difference, maybe. Enough to shove you up into a higher tax bracket? Ick. Also, you would lose all the free money your employer matches.

    I am listening to The Automatic Millionaire on CD right now. I don't think there is any way I can do 10%, but I'm going to try to squeak out a way to do 1% of net income into a savings account. That may be too ambitious at this point in my debt load, but if 1% doesn't work than I will try .5%. I think the habit is more important right now than the amount. But the majority of income has to go to debt for me.

  4. shadon Says:
    1156984909

    Financially, It makes sense to apply all possible spare money to the highest interest bearing account, whether that be a credit card, retirement fund, savings, mortgage, etc. BUT...what I have learned since visiting this site is that it is equally, if not more, important to have money set aside in savings in the case of an emergency so you don't have to use the CC if life happens (which it always does).

    Once you have some money set aside (that you can draw on in case of emergency), then you can start pounding the debt.

  5. rcent106 Says:
    1156986311

    You need to keep plugging away at the credit card AND savings besides the 401K! You need to look at the whole picture in which I agree with Shadon. You need to have an emergency fund, so saving is a must - today it is not if but when an emergency comes up (vehicle, medical, dental, etc.).
    In addition, you need to look at all areas and create a "financially responsible" plan! You would probably be able to come up with the necessary funds for savings, paying more on credit cards and have the funds put into the 401K just by watching where the money goes and finding where a change can be made.
    By being a little creative, you will find it possible.

  6. baselle Says:
    1157082592

    Another thought is to save a token amount, say $1000, for dire emergencies and for peace of mind that you have something, but after the $1000 is saved up to hit the debt very, very hard.

  7. Ian Says:
    1196296594

    What about, once things get themselves sorted, switching to a debit card? It works exactly like a credit card, but it's 100% of your own money you're drawing on. i.e If you only have $50 in your bank account, you can only spend $50 using the card...

    Just my 2c worth.

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