I just started reading the book “Smart Couples Finish Rich” and one of the first things it mentions is to “pay yourself first”. This advice is similar to the “Wealthy Barber” and probably every other personal finance book ever written. Usually this involves getting money deducted from your bank account automatically so that you don’t miss it and it gets saved for retirement or vacations or whatever.
While I think this is a good strategy for a lot of people, in some cases it’s really bad advice. In particular, people that have excessive debt should be focusing their saving efforts on their debts and nothing else – not their retirements or vacations. Now someone in that situation might ask why they shouldn’t be paying themselves first as well and the answer is that they already have paid themselves, in some cases they might have overpaid themselves by a long shot. The reality is that debt results from spending more than you earn, in some cases this can’t be helped but in most cases it results from a deliberate decision to spend more money ie on a bigger, more expensive house (I did this), more vacations, newer cars etc. Sometimes it results from just not keeping track of your finances properly. Regardless of how you end up in the situation of having excessive debt, you eventually have to pay the piper. Some people choose to tackle debt head on by cutting their spending and reducing the debt as fast as they can. Others will cut back a bit and reduce the debt at their leisure. The remainder will ignore it completely and will pay during their retirement when they have a lower standard of living because they still have debt they have to service.
Please note that I’m not referring to deductible debt ie the type you have with an investment loan.
Do you have a lot of debt? How do you know if it’s excessive?
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