Wednesday, January 3, 2007

Always pay yourself first before settling other monthly bills.

How do you budget each month? Most folks pay bills in the following order: the mortgage or rent first, then utility bills, car payments, food; then, they scramble to cover the monthly minimums on credit cards and miscellaneous expenses.

Let us try a different approach to monthly budgeting: Pay yourself first. Even if you cannot save 10% of your net income—the amount I recommend as a target—saving something now is vital.

Paying yourself first is the most underrated way to accumulate wealth over time.

The second bill is now the mortgage or rent. Then, as you prioritise them, come all other necessary expenses. What we have done here, simply by "paying ourselves first", is recover some of the from the bottom and move it to the top.

Paying yourself first will force you to become more frugal with your spending habits because the other bills must be paid.

With that extra money, you can immediately begin to stash money in your new emergency fund.

An emergency fund is a special account that can be used for unexpected bills which may arise. It should be built up to at least 10% of your annual net income. If you are a seasonal employee (such as in the construction industry or other uneven employment forms), you should have a backup fund of at least 3 months of your annual net income.

Keep putting money into this fund on a regular basis. Eventually, you will reach a level that is comfortable for you. Then you can begin to attack your long-term goals by reallocating that monthly payment to anotherinvestment goal.

Make up your mind to stick to the plan. Re-evaluate it from time to time to see if it can be improved. If temporary emergencies occur which make the plan impossible to continue, start it again as soon as possible.

The most important point is to use your money wisely. When you have mastered control over your everyday financial life, you will feel a real sense of accomplishment and self-satisfaction.

Once you are on your way, the rest of your attitudes about money will change, and you will begin to view money in a new light.

Excerpted from "Get Rich Slow" by Tama McAlesse.

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