Today I have a guest post from Natalie who blogs at Debt and the Girl. Natalie has student loans, a mortgage, and credit card debt and she is like many of the rest of us, just trying to get out of debt. Here today is Natalie’s take on why we should always pay ourselves first when budgeting.
Budgeting your money can be a very daunting task and can leave you running for the hills if you are not aware how to do it. In truth, budgeting just doesn’t seem like a very fun thing to do as it makes you pay attention to what really matters. Many people say that you must allocate a certain amount for this and that, but it is also EXTREMELY important that you pay yourself first. Why?
The simple truth is you just never know when you may need cash on hand for life’s little emergencies. This is the exact reason why it is so important to have a “rainy day fund” or an emergency account that can be used for the unpredictable but undeniable occurrences that you may encounter. Many people say that it is better to pay down debt during this time as a way of accumulating less interest on loans or credit card balances but there is a problem with this as well. If you have no savings and your car breaks down, you are at the mercy of family kindness or other forms of dubious lending. Many have turned to the infamously sinister title or payday loans that have been known to charge as much as 250% APR and many states don’t even have any laws on the books to protect you from such astronomical rates! Where I live, there are title loans places everywhere with the promise of fast cash and no waiting. These companies have only exploded in business since the beginning of the recession. Are you comfortable with taking that risk? I know it encourages me to pay myself via my online savings accounts even more.
But what about using credit cards for paying things when you don’t have cash? Well, you could do that if you have them at all, but don’t forget the crazy APR rates most of them charge. Not to mention that there are still a lot of places that don’t take credit cards. For my rent, you must pay with funds from a bank or risk the late charges (and damage on your credit report). Most of my utility bills are also the same. My mechanic only takes cash so that is what I would have to pay him with if my car breaks down. The truth is I need cold hard cash for a lot of really important things, and I would be in a very financially dangerous situation if I did not have it when I needed it.
Many economic experts preach about what is the right amount to have on hand for an emergency fund. I do not even profess to know the right amount for everyone as every person is different. I will say that at least $500-$1000 seems to be a pretty good starting amount and can take care of a lot of things. Many also swear that you must save several months worth of expenses in a separate account in case of disaster. While that’s all well and good, many cannot achieve this quickly. Unless you are a risk-taker or have friends or family that can help you, make sure you take care of your self first. “Paying” with what you can is a way of safeguarding yourself from the typical money traps that are out there.
Thank you, Natalie. Sage advice from a young woman who is has her thinking cap on!