Pay Yourself First, or is that second, or third

You’ve undoubtedly heard the expression, Pay Yourself First.  In essence this means, before paying for any expenses, you set aside money for retirement or your emergency fund.  But are you really paying yourself first?

You are if you contribute pre-tax dollars to a retirement account (401k, 403b, 457).  In other words, before the government takes its cut, your 5, 10 or 15% toward retirement is deducted from your gross pay before taxes.

If you don’t contribute to a retirement account with pre-tax dollars, you aren’t paying yourself first.

Christians may be familiar with the following passage from Luke 20:20 – 26 (New International Version)

Keeping a close watch on him, [the chief priests and the teachers of the law] sent spies, who pretended to be honest.  They hoped to catch Jesus in something he said so that they might hand him over to the power and authority of the governor.  So the spies questioned him:  “Teacher, we know that you speak and teach what is right, and that you do not show partiality but teach the way of God in accordance with the truth.  Is it right for us to pay taxes to Caesar or not?”

He saw through their duplicity and said to them, “Show me a denarius.  Whose portrait and inscription are on it?

“Caesar’s”, they replied.

He said to them, “Then give to Caesar what is Caesar’s, and to God what is God’s.”

So if you don’t contribute pre tax dollars to a retirement account, you actually pay the government (Caesar) first, presuming your employer deducts taxes from your salary.  Under this circumstance, if, with your net pay you contribute money to a Roth IRA or to an emergency fund, you are paying yourself second.

Now, assuming you don’t contribute pre tax dollars to a retirement account and the government collects its taxes before you receive your net pay, and for religious or other reasons, you believe in giving or tithing to a church or other charitable cause before you spend your net pay including funding your Roth IRA or an emergency fund, then you are paying yourself third.

There is “no judgment” meant by this analysis.  It demonstrates that paying yourself first does not always happen.  Whether you pay yourself first, second or third, the point is to pay yourself.   In this dog-eat-dog, capitalistic society, you have to take care of yourself, because there is no guarantee that family, friends, a non-profit organization, your church or the government will take care of you.

Save, save, save.  Set aside money on a regular basis toward a retirement account and  an emergency fund.


Rule of Thumb: Saving vs. Investing


Saving = for a period of five years or less.

Deposited where = savings accounts, Christmas/holiday accounts, vacations accounts, certificates of  deposit (CDs), money market accounts, money market mutual funds.

For what = emergency fund, car maintenance, Christmas/holiday gifts, down payment on a house, vacation.

Investing = for a period of more than five years.

Deposited where = retirement [IRA, Roth IRA, 401(k), 403(b), 457], mutual funds [non retirement accounts] , ETF (electronically traded funds), Treasury Inflation Protected Securities (TIPS), individual stocks, individual bonds.

For what = child’s college fund, retirement, purchase of vacation home

Favoring Borrowers Over Savers

On Wednesday, Feb 24th, Federal Reserve Board Chairman Ben Bernanke testified before a House Committee.  Bernanke stated interest rates will remain at record low levels for an extended period of time to ensure the nation’s snail pace recovery remains on track.

Yeah,  if you are a borrower.  You want to buy a house?  Great, interest rates are near historic lows.  Buy a car?  You can find a low rate  as well.

[The banks, whom American taxpayers bailed out, are showing their appreciation by sticking it to American consumers by raising the interest rates on credit cards and reducing credit limits.  Even more insulting, banks will charge consumers for “inactivity” – for not using their credit cards.  Amazing!  What would bankers have done if the American taxpayer hadn’t rescued them?]

If you are saver, however, you are out of luck.  The interest rate on a savings account, barely 1%.  On a one year CD, if you’re lucky, 1.5 to 2.0%.  Five year CDs offer the best interest rate but who wants to lock up their money for  such a long period of time especially with most economists projecting the Fed will have to raise interest rates in the future?

What’s ironic is, because of the Great Recession, Americans are saving more today than at any time in the last 10 years.  Yet, the interest earned is pathetic.  Despite the disincentive of historically low interest rate on savings, people are saving because of the very fragile economy.

If you are a retiree living off of fixed income, you’re hosed.  The money you have socked away is basically earning nothing.

Mr. Bernanke, stopping thinking about borrowers only.  Dangle a carrot before the eyes of savers.  Increase the federal funds rate.

Star Trek & Money

Pleasantly surprised to find references to Star Trek in personal finance books.

Chapter 8:  Live Long and Prosper

The New Frugality: How to Consume Less, Save More, and Live Better by Chris Farrell


Your Money Ratios takes emotion out of saving for retirement.  You simply follow the numbers consistently, year after year, and do your best to ignore what everyone else is doing or where the market goes.  Over time, if you invest and make your financial decisions this way, you are likely to reach your goals.  A century of financial and economic facts bear this out, time and time again.  When it comes to your money and your future, you want to be Mr. Spock, not James T. Kirk.”

From pages 3-4 of  Your Money Ratio$: 8 Simple Tools for Financial Security by Charles Farrell, J.D., LL.M.

Hey, Chris Farrell and Charles Farrell are thinking on the same wavelength.  Don’t know if they are related. :-O

Avoiding Money Market Mutual Funds

In the late 1990s, while stationed on Guam, a friend suggested a way for me to organize my money.  He recommended that I open a money market mutual fund account with Waterhouse Securities (later TD Waterhouse and now TD Bank?) and  move my IRA (then with Invesco) under Waterhouse Securities.  He suggested I regularly fund the money market mutual fund.  Through this fund I could purchase stocks, bonds or mutual funds.

I followed my friend’s recommendations.  Over time I opened a money market mutual fund with Vanguard.  And it was well-funded (especially after I paid off my car).  Well-funded until I purchased my house in early 2005.  I eventually closed the Vanguard money market mutual fund later in 2005.

In 2007 I opened up a money market mutual fund with T. Rowe Price.  I really wanted to open a new account with Vanguard; however, Vanguard requires a minimum deposit of $3,000.  T. Rowe Price requires a minimum of $2,500 but allows you to open up an account if you deposit at least $50 or $100/month by automatic withdrawal.

In mid September 2008 the financial world was turned upside when  Lehman Brothers went belly up.  But I noticed there was some other undercurrent of anxiety.  I checked and but saw no news stories explaining this additional anxiety. Then I visited   The website reported that a money market mutual fund, the Reserve Prime Fund, held something like $685 million in Lehman corporate bonds.  When Lehman collapsed, the value of those corporate bonds dropped to zero.  As a result, the Reserve Prime Fund could not maintain the $1 net asset value (nav).  In fact, the NAV fell below $1.  The Reserve Prime Fund “broke the buck.”

When I learned what had happened, I panicked.  I remember that evening sitting on the phone for an extended period of time waiting to speak with a T. Rowe Price representative.  I was not the only one.  Eventually, after an extended wait, I spoke with a T. Rowe Price rep and requested my money be transferred from the Prime Money Market Mutual Fund (composed of highly rated corporate bonds) to the Treasury Money Market Mutual Fund.   I felt better once the money was moved.  Later that evening I explained to my sister what happened and advised her to move her money.

A few days later, with the financial & economic news still rather gloomy, I decided to pull all my money from T. Rowe Price.  I had the money (nowhere close to $100,000) transferred to my credit union where it would be federally insured.

It’s been a year and half since the anxiety- laden days of September 2008.  Yet I have no desire to open another money market mutual fund account.  Pre-September 2008 I believed that money market mutual funds were virtually, if not in fact, as a safe as a bank.  Well, September 2008 completely changed my outlook.

Surprised to discover one of the personal finance gurus shares this opinion.

Money market funds are no longer a safe enough parking place for cash.  The industry doesn’t want to acknowledge it.  Regulators are trying to avoid the issue. Yet for many conservative savers it’s simply too risky a product.

*                                                 *                                                    *

Money funds gradually evolved into a staid investment haven for cash.  The business manages more than $1 trillion for individual savers.  You always earn a market rate of interest and you can write checks off your account.  The industry pledged that a dollar invested in a money fund would be worth a dollar no matter what.  It worked for a long time.

That is, until the fall of 2008.  The industry broke its word during the darkest days of the credit crunch.  When money market fund values started falling below a buck, taxpayers had to rescue the industry.  You can’t trust the money fund “We won’t break a buck” pledge anymore.  How do we know our savings won’t vaporize during the next financial crisis?  We don’t.  The money in a fund is at risk.

From page 143, 144 of The New Frugality: How to Consume Less, Save More, and Live Better by Chris Farrell.

Thus, I avoid money market mutual funds.  My money (the little I have) is divided between a federally insured credit union and a federally insured bank.

Alternatives to Gym Membership

Was losing weight or becoming fit one of your  New Year’s Resolutions?   Did you join a gym?  How is it so far?  Are you going as often as you hoped (days missed because of the blizzards are a good excuse for missing some days)?  How much did it cost to join the gym?

I’ve never paid for gym membership.  Doesn’t mean however that I’ve never worked out at a gym on a regular basis.  I did thanks to you and other tax payers.  During my seven years in the military gyms were available on each base and membership (from the individual perspective) was free.

Since I’ve become a civilian I haven’t stepped into a gym.  I’ve found other, less expensive ways, to stay in shape.  Here are some suggestions.

During this time of year – cold, wet, dark, snowy – who wants to get up early, leave the comfort of one’s home, to go to a gym some distance away to work out?

When I lived at the condo (which does not have a fitness center or gym onsite), I walked the stairs.  To be more precise, I would get up early with an old walkman (this is before I purchased my iPod.  You will discover that I’m not a techno gadget pioneer.  I prefer to wait to all kinks have been resolved with the latest gadget and the price has dropped.)  I walked from my floor (3rd) to the top floor (8th), walked across the length of the hallway, back down to my floor (3rd).  At first this exercise left me gasping for air but over time I built up my endurance and walked this circuit six to ten times in the morning.  I paid nothing and got a great workout.  I don’t need a fancy stair climber.  I had plenty of stairs to climb at my condo.

Another alternative – buy a jump rope, probably the least expensive exercise equipment around.   All you need is space to jump.  How do boxers get in shape?   Think Rocky.  Jumping rope will definitely get your heart pumping.

You can do squats, push-ups, sit-ups, jumping jacks (remember those) without any exercise equipment.  However if you get bored easily or need motivation, there are tons of exercise DVDs available.   At least one would meet your needs.

Buying exercise equipment designed for the home is more pricey (depending on the equipment) but likely cheaper than a gym membership for a year.  There are so many types of exercise equipment that at least one device would suit your needs.

Of course, when Spring arrives (assuming you don’t have a significant problem with allergies), biking, walking, jogging/running are wonderful exercise alternatives.  Depending on the gardening project, one could also get a serious workout (my favorite, pulling the very long stolons from Bermuda grass; serious workout for arms and abs).  And your body will love the Vitamin D it absorbs from the sun.

During this Great Recession we all need to pay close attention to how and where we are spending money.  Maintaining good health doesn’t mean a gym  membership is required.  One can obtain a good workout, save money and reduce one’s carbon footprint by considering some of the alternatives to gym membership listed above.

Fast Food Breakfast & The Great Recession

I read an interesting article in today’s Washington Post entitled Fast-food breakfast sales hit snooze as fewer head to work.  The article is written by Ylan Q. Mui.

The second and third paragraphs of this article state

Breakfast sales had grown at a ravenous pace during the boom years as busy workers scarfed down sausage biscuits on the way to the office, fueling a $57 billion business and accounting for as much as a quarter of sales at some fast food chains.  Chains opened earlier and expanded their morning menus to accommodate the traffic as lunch and dinner sales flatlined.

But as the jobless rate hit 26-year highs fewer people headed to work, and even those who did worried about their spending.  So they poured bowls of cereal at home or simply slept in, putting breakfast on the back burner.

Page A1.

The article profiles one individual who would have breakfast every morning at McDonald’s – a steak, egg and cheese bagel, orange juice and coffee.  Once this individual lost his job, his visits to McDonald’s for breakfast dwindled to twice a week.  The individual now orders from the breakfast dollar menu.

Although fast food chains such as McDonald’s and Burger King are disappointed with slumping breakfast sales, maybe, this trend is a good thing.

Yesterday I attended Rooting DC, an urban gardening forum which promotes gardening as a low-cost way to provide food for families, particularly in those ares of the District of Columbia where fresh food that’s affordable is difficult to find.  The event was well-attended and the workshops informative.

Remember the expression, “you are what you eat”?   If you consume a steak, egg and cheese bagel, orange juice and coffee every work day morning, you are consuming fat, sugar and salt.  The breakfast sandwich sounds artery clogging.  The orange juice is high in sugar (or another sweetener).  Yes, one likely receives a recommended daily allowance of Vitamin C.   But eating an orange is the smarter and healthier choice.

Remember the documentary, Super Size Me?  There are so many negative consequences to one’s health ( such as diabetes, high cholesterol, obesity and hypertension) from consuming fast food laden with salt, sugar and fat.  Some Americans may believe they are being wise with their money by purchasing breakfast at a fast food chain such as McDonald’s.   Penny wise but pound foolish.  Sure, in the short term, it may seem like a smart move.  But in the long run, such a diet may shorten one’s life or reduce the quality of one’s life.

I hope individuals, whether employed or not, make a concerted effort to eat a healthy breakfast.  The guy who ate that steak, egg and cheese bagel every morning could purchase an 8 pack of flavored oatmeal for about the same price.  To complement the oatmeal, the individual should have a piece of fresh fruit.  Lean meats, small glass (4 to 6 ounces) of milk and/or juice are additional selections to add or substitute.

Save money and eat a healthy breakfast before departing for work.  Or, if yo don’t have time to eat at , then try leaving home earlier and arriving at work earlier with your packed breakfast to eat before the day begins.   I speak from experience.   Yes the “lunch bag” get s a little heavy to carry but by packing my breakfast along with my lunch, I was eating what I liked, it was a lot less expensive than buying breakfast daily and my waist line remained trim.

Enough reasons to stop eating the salt, sugar and fat laden breakfast sandwiches at the fast food chains.

Finally, some common sense

You hear it all the time from personal finance gurus – never close a credit card, even though you’ve cut up the card into tiny pieces and have no intention of every using the card again.  Why?  Because it will hurt your FICO (Fair Isaac Company) Score.  Well, at least one personal finance guru has a different perspective.   The following quote can be found on page 110 of The New Frugality:  How to Consume Less, Save More and Live Better by Chris Farrell.

I’m not a booster of the credit-scoring business.  Too many people worry about learning the tricks of the credit-scoring trade.  I’d rather break the tyranny of the credit score.  For instance, many borrowers found their credit scores dinged when their bank slashed their credit limits and even closed unused credit card accounts during the Great Recession.  The impact of a closed account comes from the effect it has on your ratio of total credit balances to total credit limits.  Closing an account lowers  your overall credit limit and raises the ratio.  The same thing happens if you close an account on your own.  It’s why a number of financial advisers recommend keeping open unused accounts.  I disagree.  The tactic doesn’t pass the common sense test.  Why maintain an account that you don’t want, don’t need, and don’t use?  Another reason to close it is that identity theft is a widespread problem.  The only real issue is timing.  If a major purchase is in your immediate future, such as buying a home, leave your unused accounts alone.  It pays to wait to close the accounts until after the deal is done.  Then I would get rid of them.  The effect on your score is fairly limited anyway, and with good habits your score will bounce back.

Thank you, thank you, thank you, Chris Farrell.

Beginning at the beginning

Okay, in my last post, I mentioned how budgeting really isn’t so hard.  I also identified a wonderful resource [Make Your Paycheck Last by Harold Moe] explaining step by step how to budget.

Well, let’s say you don’t know where to begin, you can’t secure a copy of Harold Moe’s book or you’ve tried budgeting in the past without success.   So, how do you beginning to budget?  Well, at the beginning, of course.

My suggestion – keep a journal (paper or electronic).  Write or record any and every time you spend money.  Write the amount, what was purchased or what services were paid for, and the method of payment [cash, check, debit card, credit card].  And, maintain this journal for three months, that’s right, THREE MONTHS.  Maintaining a journal for that length of time should provide you enough information about how and where you spend your money.

When should you start?  There’s no time like the present.  However, if you prefer to wait to the beginning of the next month, you can begin March 1st.

Don’t forget, you need to record all financial transactions.  Coffee purchased at Starbucks, gum from the vending machine, a newspaper from the convenience store, the check for rent or your mortgage, paying the car insurance by check, movie tickets purchased with a debit card, money to feed the parking meter,  the new pair of shoes charged on the credit card,  and paying utilities online through your bank or credit union.

So what do you do with all that information?  At the end of the first month, create the following categories of expenses:

(a) rent/mortgage

(b) utilities

(c) food (grocery store/club warehouse only)

(d) food (eating out)

(e) transportation (including parking garages & meters)

(f) dry cleaning/clothing

(h) medical/dental

(i) entertainment (movies, theater, ice skating, etc.)

(j) books/newspapers/magazines

(k) auto expenses (loan, insurance, repair & maintenance)

(l) day care/after school program

(m) pet care

(n) debt (student loans/credit cards/department store cards)

(o) personal (grooming – hair, nails, etc.)

(p) charitable gifts (church & other organizations)

(q) savings (emergency, college, retirement, down payment on home)

(r) miscellaneous

Tally the amount spent in each category.  If you want to go the extra mile, list how you paid for the expenses in each category (cash, check, debit card, credit card).

Repeat this activity for the second and third months.

At the end of three months, look carefully at how you’ve been spending your money.   Do you buy your lunch or a cup of coffee  every work day?   Are most of your clothes dry cleaned?  Do you see a movie every weekend?  Shop frequently on for books & more?  Hang out with co-workers or friends at Happy Hours  weekly and spend a lot of money on drinks?

This exercise should assist you in identifying the leaks in your money boat.  You can patch the hole by taking steps to reduce consumption in some categories.  YOU are making the decisions to reduce spending or to save more, not someone else telling YOU what to do.  And YOU are more likely to stick with YOUR budget.

Are you willing to give it a try?


Why is it so difficult for some?  What’s so hard about it?

Budgeting is basic  mathematics.  Your income minus your expenses.

Budgeting is difficult because we want to spend our money on many things but we don’t have enough money to pay for all our wants.  We don’t want to be constrained.  We want the latest stylish clothes, the latest gadget, to dine at a fancy restaurant, attend a football game, take a cruise or go to Europe/Asia/Latin America for vacation.

Hmmm, sounds like Congress, the federal government.  We can’t live within our means and neither can our government.  Ironic, isn’t it?

Well, budgeting isn’t hard; it just requires discipline.  And, it’s simple to implement.

I highly recommend Make Your Paycheck Last:  The Complete Step by Step Guide to Personal and Family Financial Success by Harold Moe.  This book is under 100 pages (96 to be exact).  No fancy photos, graphs or charts.  The information is golden.

Check out the reviews on  I’ve recommended this book to many friends and colleagues.  One friend, after reading the book, kept mentioning Harold Moe to me when we met once a month for dinner.

If  you find budgeting scary, read Make Your Paycheck Last.  You won’t regret investing the time.  Your money management skills will improve dramatically.

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