Handle Your Finances

Control Your Finances

–Pay Yourself First—

You just found the job that fits within the things you love and believe and your strengths, talents and expertise.  You also have some debts in the form of student loans and credit cards.  You have little or no savings.  What do you do to get yourself on your feet, control your finances and begin to save some money for the future?  The first thing you must do is pay yourself first!!  Before you pay your bills, buy groceries, go out to dinner or spend any money you are going to pay yourself first.

Mike Michalowicz’s book Profit First teaches entrepreneurs how to pay themselves first to build their wealth and companies.  We can use the same philosophies he teaches and apply them to ourselves.  Let me show you how to do it with a simple example.  The first step will be to have four separate bank accounts.

1. Checking account with debit card.
   1. Deposit your pay checks– ideally by direct deposit.
2. Savings account number one will be your expense holding account.
   1. You will set this one up so you can transfer money in and out from your checking account as needed.
3. Savings account number two, Short Term, will be for emergencies and planned large expenses.
   1. Transfer money into it from your checking account but not back to your checking account.
   2. You must go to the bank to move the money into your checking account, so you will have time to think about it before you take money out of it.
   3. You will only take money from this account in an emergency or to purchase something you were specifically saving for like a car or vacation.
4. Savings account number three, Long Term, will be at a credit union that is difficult and inconvenient for you to get to.
   1. You can transfer money from your primary checking account to this account but not back.
   2. You will not touch this account, you will let it grow.
   3. The purpose of this account is for future investments and growth and not lifestyle.

Now let’s put our example to life.  Here are the particulars:

• Your first job pays your $60,000 per year or $5000 per month twice per month on the 15^th and 30th.
• You net pay per month is $3750 after taxes are taken out for net checks of $1875 twice per month.
• You have $75,000 in student loan debt at 5% interest for 15 years with a monthly payment of $593 per month.
• You have one credit card with balance $3500 and minimum payment of $75 each month.
• You have an old car that is paid for, but you will need a new one in a year.
• You find a one-bedroom apartment close to your office for $1200 per month. You could find something cheaper with roommates, but you did that through college and don’t want to now.
• You used a 2^nd credit card for a cash advance of $2400 to pay your first and last month’s rent and the minimum payment will be $50 per month.
• Utilities are $250 per month which includes your phone and internet.
• Food is $400 per month.
• Extra living expenses are $200 per month.

The very first thing you will do each month when your checks arrive is pay yourself by moving money into savings accounts two and three (Short Term and Long Term).  Our number one goal is to pay yourself before anything else.  Our second goal is to pay off the credit card debt as fast as possible.  In order to do this, we will only put 1% of your gross check into each of the two savings accounts or $25 each account with each check for a total of $50 each account or $100 per month for a total of 2% savings.  Based on the numbers in our example you will have $882 per month left after paying all of the bills and living expenses to apply to you smallest credit card balance so it can be paid off as fast as possible.  Make the minimum payment on the other card each month. Here is what your month will look like:

With each check you will move the money not needed that half of the month into your holding savings account.  That way you will only have in your checking account what you need for each half of the month.  In the example below, the number in red totals $1525 and that will be moved to your holding savings account, so you can pay the bills when they come due next month.  All of the moving of money will be done on the 15^th and 30^th of the month when you receive your checks.  When the bills are due, move the money from your holding savings account back to checking and make your payments from your checking account.

When credit card number one with the $2400 balance is due apply the entire payment of $1007 to credit card number one until it is paid off.  Once it is paid off apply everything to credit card number two.  The total $5900 in credit card debt should be paid off in 6 months.  With no credit card debt, you can now increase the amounts going into your two savings accounts to 5% per account or 10% total each month.  At this point there will be an excess each month of $607 to put to good use.  We know you will need a new car in another 6 months, so you can now move this additional $607 into your Short Term savings account so you can start saving for your new car.  In six months you should have $3600 more in your Short Term savings account for a total of $5400 and your Long Term account will have $1800 total.  Holy cow! You just saved $7200 in the first year.

Let’s see what happens when you buy that new car for $24,000 at 0% APR and 10% down.  If we include sales taxes and license fees the cost of the car will be $26400.  You use your $3600 for the down payment and your cost is now $22,800 and the payments are $475 for four years.  Let’s see how that plays out for you.

Now you are still paying yourself first $500 per month into your savings accounts, you still have $132 extra, a new car and your savings is growing.  The extra $132 could be applied to your student loan principle or you could save it for another planned event.  Don’t forget that after your first year you will get a pay raise of 3% and now you are putting another $15 per month in your savings accounts.

If you would like my Profit First_Home Calculator for your own use you can email me directly at rday@life-sol.com.  Be sure to read Mike Michalowicz’s book Profit First.  Please post any comments or questions and I will respond right away.

 Robert Day, MBA

rday@life-sol.com

www.life-sol.com