We each have our own tolerance for debt. For me, it’s not something I enjoy. Owing other people money is toward the bottom of things I’d like to do. Others may not mind carrying some debt, and barely think twice about it.
As I think about it, no matter which side of it you’re on, there can be a risk of thinking of money as something that is given to others in exchange for things.
Paying Others First
For the person who doesn’t mind taking on debt, it can lead to a life that is structured in such a way that certain fixed payments have to be made on a regular basis. For example, an expensive mortgage, car payment, credit card balance partial payments, and the like.
In this case, people first think about the payments they must make to others, and then decide that what’s left over is what they have to spend on other things.
If lucky, whatever is left over after that might be allocated toward savings.
At extreme end, here is what that “Pay others first” model can look like:
- Repay debt
- Spend on other necessary life expenses
- Spend on what you enjoy
While that can bring the possibility of enjoying the here and now, it places the future in a position of lesser importance.
Paying Yourself First
With this approach, our mindset is not that we have to first take care of debt and other expenses. It’s not about looking at money as something to spend on enjoying life today first and foremost.
Rather, it’s an approach that’s defensive in the short term but really grounded in long-term thinking. It’s that we should first prioritize saving, and then secondarily focus on spending for enjoying life today. Yes, it’s saving before spending for today’s fun.
I know that might sound kind of boring, I won’t disagree with that. But in the long run, I think this is the way to go.
That sequence I showed above would be altered to look like this:
- Pay yourself first with a high rate of savings
- Pay whatever tolerable debt (modest mortgage, student loan) you might still have – which is hopefully minimal
- Spend on truly necessary daily expenses, and eliminate wastefulness
- Spend on what you enjoy
While the “enjoy” part is a lower priority here than in the prior ordering, I think the key thing is that it’s only for a certain period of time. In the long run, with the Pay Yourself First approach, you’ll be more likely to have seen your money compound and grow to impressive amounts. Investing your money and earning a solid rate of return can potentially do wonders for one’s long-term finances.
Thus, the long-term ordering might eliminate savings and debt repayment, and be totally focused on your routine expenses and simply spending on what you enjoy.
Pay others first and save later means constantly hustling to maintain your lifestyle. You might start out sprinting like a rabbit, beating that tortoise who delays gratification.
But in the long run, the tortoise who pays himself (or herself) first will likely achieve a more fruitful financial existence – with the money to enjoy things later in life when it gets harder to find and keep work.
I say pay yourself first is the way to go!
How do you approach savings? Spend first and save later, or save first and spend later?