Pay Yourself First - some thoughts on personal finance

I'm getting towards the end of the book by Dave Ramsey entitled "Financial Peace Revisited".

In this he brings up the concept of "paying yourself" first.   The idea that you need to make sure you set aside something on a regular basis for yourself.  You have your regular bills and the like but, if you don't do something for you as a line item you will never get ahead.




The basic idea here is that if you can pay for things in cash and not credit (with the associated 10%+ interest rate) you come out ahead.  And how do you get to the point you can pay for things with CASH?
First you have to control you spending and have the patience to hold off on bigger purchases and  look for bargains and the like.  By saving up the money for the purchase over a few weeks or months you develop the ability to look for a bargain and have most if not all the money to pay up front.  That way you save all the interest charges.

So what does this have to do with "paying yourself" first?   If you develop in a budget a line item where you set something aside it's like your paying yourself.  You have become like the electric or gas bill.  You might not be able to do much in the short term if you are saddled with a lot of credit card debt.
By moving to a system where you pay with cash where possible (might not make sense on some larger purchases), you save so much in interest in the long run.

The basic idea is if you can wait say 8 weeks and save the money needed to purchase the $200 item instead of buy on credit you will save a lot of money in the long haul.  The difference can be $20-$30 over the 8 weeks.  If you finance your purchase and let's assume you don't pay it all off at the end of the month so you have a portion accruing interest @ 18% (a relatively common average).
so let's take that $200 purchase and only make a minimum payment of say $50 to keep things simple, the next month you have $150 to payoff and the 18% interest begins.  That works to about $14 in interest over several months if you just make minimum payments of say $15 each month.  It would be less for a minimum of say $40 or $50 getting it down to say $5 or $6 in interest.

Now for an amount like this you say $15 is not all that much.  If you are putting just about everything on the card the interest begins to build as you can afford to only make the minimum payment.
Remember the unfortunate part is that the interest you pay is on the interest as well....... bad in the long haul..... avoid it if at all possible.  I repeat avoid it at all possible.



Check out the chart below that navigates when it is good to use cash verses credit.  Per people like Dave Ramsey you should be cutting up your credit cards and going cash.  If you pay yourself first you won't need to use credit.....  most of the time.

Cash vs. Credit Info-Graphic Chart

http://www.businessinsider.com/credit-debit-or-cash-2014-9

Now if you plan ahead and have some emergency funds you'll be able to go towards cash only payments.  Pros and Cons of carrying cash - Dave Ramsey


There  is peace and security when you can do you payments in cash.  You will spend less, have more control over things and pay a heck of a lot less in interest.  Have you heard of the deals where they give you 90 days or 6 months same as cash?   They are banking on the fact you will not pay off the amount in the 90 days or 6 months.  The interest from day one then is piled on.
Recently had to have a bunch of dental work done.  Well over $1,000 in all.  Well they are offering 18 months same as cash.  So I have till October 2016 to pay off the amount.   Now on the bill they have a minimum payment of ~$43.  Factoring that out over the 18 months it comes to only $775.  See the deception?  Pay only the minimum and you come up far short.  So the new amount at the end of the 18 months includes the interest accrued from the beginning.  Hundreds of dollars just got added on to your total.  All at once since they don't have to have a minimum that will actually get you to the end of the promotional period with the total paid off.  Sly and tricky huh?

You can figure out interest payment by going to the following site by Bankrate.com
Interest payments - credit cards - BankRate.com

Bottom line I have to be careful and not get sucked into paying only the minimum.  So instead of the $43  I need to be paying the $73 to cover everything.

If you mess around with the numbers on the Bankrate page you can tell how much interest you will be paying over time.  It's not pretty really.  That is why you have to get into the habit of paying cash, controlling your spending, being patient, and "Paying yourself" such that you can take advantage of special deals, keep from paying interest, and have some funds in reserve.........

I got turned on to a system recently that is called a "Sink Fund".  It is kind of like paying for the item in question ahead of time and thus avoiding interest.  That said you might think that seems like something dumb on small purchases.  Make no sense to save up to buy that Foreman Grill on sale at Kohl's department store.  Maybe but, only if you have move set aside already.  Sink funds are for items you kind of want down the road and can plan for.  It might be the new dining room set, or the Blu-Ray player, Laptop, or Car.  You figure a rough amount you need to save and then figure out when you need said item.  That helps to figure your amount per week or month to save.

I for example want to have a new Blu-Ray player for Christmas.  I have about 30 weeks to go till then.  So if a typical Blu-Ray player is $120 dollars I'll need to save about $5 per week to meet my goal.  That is assuming I'll be buying it just at Christmas and not after or during the Black Friday frenzy.  Any way I will have to wait a little longer, but, with my current financial situation I save a ton in interest.  I'll also be able to search out bargains, and other deals till then.
We did something similar about a year ago with our TV purchase.  We did a lot of hunting, comparing and deciding.  Finally, the deal that worked the best was just after the new year at Walmart.  We though oh the deals around Black Friday will be good.  All off brands, or something way out of our price range.   These are simple habits, that help you to "pay yourself" first.




Consider a sink fund, or automatic saving account deposits.  I have some going to one of the "Online Banks" every month.  It automatically, and it is forcing me to save some money.  I hardly see or think of the amount since it is not so readily accessible.
You can do the same on your pay check.  Have some of the money be deposited in your savings verses your checking, heck you can have multiple accounts.  And how about your 401(k).
You should be having at least to the company match taken out.  That includes free money, and with time and average earning of say 4-12% you will be surprised how much you can grow the account to by the time you retire.  Even the few bucks 4% might constitute will create a large nest egg over 30-40 years.  That is "paying yourself"  so you are not eating Alpo in retirement.

 

Bottom line, if you want to get ahead you have to include yourself a your pay check allocations. Otherwise, you won't get anywhere and might just end up Bankrupt if your not careful.

Buiadh - NO - Bas

Negative Income Tax & Flat Tax - Another Look

Many people probably have seen or heard the news that due to the current tax climate Phil Mickelson is reviewing his options and even considering a move out of state.

What is he complaining about?  He is complaining that 62-63% of his income is being taken in various forms of taxes - income, social security, disability, unemployment and more.

"If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate is 62, 63 percent," Mickelson had said. "So I've got to make some decisions on what I'm going to do."  Phil Mickelson regrets airing opinion on taxes

Some would say hey he just has to pay his fair share and if that happens to be 60% then so be it.  The guy making 15k per year could never afford to live if 60% of his salary was wiped out in combined taxes.  Those that make 20 million annually well in reality that would leave them a fair amount of money to spend.

More then I'll make in a 10 year period.  However, what incentive does this person have to continue to earn 20 million if a majority of his earning will be taken in taxes.

Even the lower wage earner is actually being hit with a fair amount of taxes.  There is the ~7.6% for social security and medicare.  Then you have to throw the unemployment and disability taxes on top of that that amount to ~6%.  That is covered by the employer but, think of what happens when your self employed which is where Phil Mickelson falls.

Yes there are caps on how much income is figured in for social security and the like but, even the low wage earners are being hit.  Everyone forgets about that.  Lower wage earners generally will get most of their federal income tax back, and also much of the state tax if it is present.  But, they do not escape taxes all together.

Something interesting happened back in November in the state of California.  We had two competing tax propositions on the ballot.  They both claimed to be upping taxes to help fund the schools that have had their budgets slashed over the last few years due to the great recession.   One proposal was going to up the income tax on the wealthy, and add a 1/4¢ to the sales tax.  This money was to help the K-12 and college systems restore some funding.

The alternate proposal claimed to be sending the money directly to the school districts and was going to increase the income tax on everyone though still heavier on the wealthy.  Which do you think passed?

The one that effect the wealthy passed while the other went down in flames with about 75% of the people voting against it.  In reality the other did not pass by all that much.  A slight majority at 55%.

Why should any one be surprised?   People always vote in their self interest.  NO one really want to pay more in income tax.  But, they did not have a problem hitting the other guy deemed to be making a high income to pay "his fair share".

All this hardly promotes people to want to go out and make a gob of money.  And sadly if you can play a tax adviser $10,000 to save 80-90k in taxes who would not do it?   But, those folks in the middle get hurt the worst in all this.   They can't afford the high cost attorney or tax consultant, so they suffer.

This is where the idea of a flat tax comes in.  You make things predicable and fair.  However, some say that the poor will end up paying taxes they may not have paid before under the current system.  It is for this that a flat exemption be provided in many peoples cases.  Much like the standard deduction.  Even Milton Friedman has an idea of a negative income tax.  It's like the flat tax though those that make little or nothing get actually get money back. Much like the earned income credit currently out there. (see the video below for an explanation)

One way or the another a simplification of the system is very much in order.  And for a flat income tax to work you need it to cover all your income.  Investment and any other.  If you earn $5 on money in the bank that has to be in the pot.  If you win some money at a casino that has to be in the pot.  If you earn 30k because you sweat day in and day out at the car wash that has to be in the pot.  If you make some money off of a rental property that has to be in the pot.  ALL INCOME HAS TO BE INCLUDED FOR THIS TO WORK.

One of the big things many get concerned about is that any change in the tax system not make the poor poorer and the rich richer and also that it maintain a more or less similar flow in tax revenue.   For it does not good in many peoples minds to lower over all tax collection by say 1 trillion when the current budget is not reduced in any meaningful way.  Spending at the Federal level has to be considered.

Now some would say that as the income tax rates are lowered and the system cleaned up you may well find more people in the pool of taxable workers and in the end you get the similar amounts of tax revenue.

But, as Friedman mentions all the way back in 1968 you have to be careful to not decentivize those on welfare from attempting to earn some money.  For some of them earning a small amount of money would reduce the welfare amount and thus the $50 or $100 would cause them to come out with less.  Granted this is 1968 money and minimum wage back in the day was $1.60 so you can see how that works out.

We have to keep these things in mind when we work to reduce peoples dependence on welfare, food stamps and the like.  They system needs to be such that we incentivize people to get out and work and not just stay at home and have more kids just to get more money.


Buaidh - NO - Bas