Why This Popular Advice Doesn’t Work for Every Financial SituationSep 19, 2022
Whether for an individual or a small business, paying yourself first is a strategy many financial advisors share regularly with their clients. As an advisor myself, I do not.
Books like Pay Yourself First, by Lynn O’High, first published in 1984 which continues to be updated and re-released, and Profit First by Mike Michalowicz, along with other best sellers, keep this rule circulating as a step to financial freedom. But it’s not a step that most people can take. For some it becomes yet another burden, a payment to be made, that seems unnecessary.
The idea is simple enough: Individuals and small businesses should generally put a percentage of income or an agreed-upon fixed amount toward savings and investments before paying their bills and other obligations. This idea is meant to force people to accumulate savings. By paying yourself first, you prioritize investment in yourself. It sounds logical and even empowering, but then why doesn’t it always work?
No one-size-fits-all money strategy
The “paying yourself first” strategy doesn’t work because it ignores one of the biggest problems we have when it comes to money: The psychological component that comes with our relationship with money. Most of us grew up with no formal education regarding finances or even simple classes on how to create a budget or balance a check book.
Our connection to money tends to be what we see in our households growing up or what we consume on TV, movies and the internet. Our ideas of what money means, and what it can do, become skewed.
The fallacy is believing when you financially have what you need, you’re considered a somebody. You can see this dynamic in most any school. For example, initially, the cool kids tend to be the ones with the perceived cooler stuff, the latest fad clothing or nicer bookbags, where the less cool kids will be the ones who don’t have those items. It doesn’t end in school. We see examples in daily life in the cars we drive. The perception is that someone driving a brand new Audi is financially well-off, whereas someone driving an old Honda Civic must be struggling. The truth may be very different. The person driving the fancy expensive car may be making payments they can barely afford, and the person driving the old car may have paid off their loan years ago and is investing regularly in their retirement. However, we still perceive the person driving the Audi as the cool one.
We see this everywhere in society. When you can’t make ends meet, you’re seen as a nobody. The more you seem to have materially, the more value is placed on you as a person (e.g., see any homeless person versus a celebrity walking the red carpet).
That thought process, most times subconscious, makes it difficult for someone of little means to pay themselves first before paying their bills. Why? Because it’s hard to pay yourself first when you don't think you’re worthy of being rewarded before paying your obligations. Paying yourself first feels like a luxury, not an investment. We’re confused by what having money means so investing in ourselves, like putting money aside in a savings account doesn’t compute when you’re driving an old car. We think more stuff, especially new stuff, equals success. It’s difficult for people who are struggling and living paycheck to paycheck to put money aside for themselves first and then pay their bills.
Most of us were not taught about finances in school. We are not aware of how an investment can help us in the future. Paying ourselves first is hard to do because it appears nonsensical when there are bills to be paid to keep the lights on. An investment in yourself seems pointless.
If you have never experienced the following:
- Received a call from a collection agency.
- Felt the embarrassment of red-lined overdue notices.
- Been threatened with eviction.
- Been denied a loan from your own bank repeatedly no matter your credit score.
- Had to get a payday loan for the most basic of items.
Then of course a strategy of paying yourself first sounds like a doable step to get your finances back on track. But in most cases, it’s the wrong approach.
Like most things in life, a one size fits all strategy isn’t going to work for all businesses or all individuals. Generalized practices tend to set people up for failure. Look at diet/weight loss culture as an easy comparison.
What money means to you
So, whether you are just getting by or a small company starting out or a person of means who spends too much and saves too little, the same problem exists. There is a misunderstanding of what money means.
We struggle with money — even people with wealth struggle — because we don’t understand its purpose. A great example is when someone wins the lottery and thinks all their prayers have been answered. Many end up in debt and sometimes in a worse situation than before they won.
No matter how much income or wealth you have, the first approach to financial health is to discuss how money does not define who you are. I have worked with clients who are financially well off but have the most miserable lives, and I’ve worked with poorer clients who are just as miserable. I’ve also worked with high-end wealth clients who are as content and joyful as anyone else I know.
Money can give people far greater choices. But sometimes, having that many choices isn’t necessarily an easier or happier position to be in. Who we are, regardless of our income or wealth, is what truly matters.
Money can consume you emotionally when you’re living paycheck to paycheck and barely making ends meet. When you can make the distinction that you’re not the amount of money in your bank account and that who you are as a person has nothing to do with how much money you have or don’t have, that change in perspective can help fix your financial situation in various ways. One way is by understanding that your financial situation can always change for the better. Just because your credit score may be low or you don’t have a savings account, all of these financial issues can be worked on. Your credit score or how much you have in your bank account do not mean you’re a good person or a bad person. It’s just another opportunity to learn something new and do a reset.
Real learning and financial literacy can begin when you change your relationship with money.
One way to think about money is by trying to reframe what it is in your life. Imagine you’re sitting on the couch watching television. It’s a decent size set. You can watch whatever show you want at your leisure. If the television breaks, what do you do?
Initially, you might get upset or disappointed. But you’ll either find a way to fix the television or buy a new one. You might miss your favorite shows and it might be difficult to figure out how to get a new television, but you adjust, right? You know that, eventually, you’ll get a replacement.
Let’s talk about what didn’t happen in that scenario.
You didn’t fall into some deep depression for days on your couch or over analyze who you are in the world that you didn’t have a better-quality television set. You weren’t overcome with guilt that made you ache for weeks about why you never had a more suitable, reliable television set. Most likely you didn’t cry. You didn’t go down the rabbit hole thinking about past television sets or how your television set was so much better when you were younger. You didn’t mull over where you went wrong in life... Can you guess why?
Money is just a tool
Although we might like a big flat-screen TV, we know a television set is just a tool. It provides us the ability to be entertained and informed. There is no correlation between the hardware that is a television and who we are as a person in the world. It’s just a tool that helps us stay informed. When you walk down the street, most people don’t know the size or make of your TV. People might assume you have one, but it has no character-defining qualities.
In the same way, money is just a tool. That’s it.
This is where we start with financial literacy. Money can provide choices, but it should never define who we are as human beings.
Contrary to popular belief, no one knows what’s in your bank account just by looking at you while you’re walking down the street. Use that to your advantage. In my experience, people with perceived wealth tend to walk tall and have an overly confident sense of self when speaking to any banker or vendor or customer service person. People just assume they are worthy of attention. People with less money tend to be more self conscious and lack confidence. Your sense of self and confidence should never be attached to your bank account. Always walk tall with a sense of purpose and knowing you are worthy of attention.
So the first question isn’t what did I do wrong that I can’t pay this bill or pay myself first? No. The first question is, what can I do to fix the financial situation I am in?
Just as you would consider options for fixing a broken television set, you need to see what’s in front of you and come up with options. Depending on your situation, that could mean downsizing in staff or spending for your business. Maybe it’s developing new spending habits. It could mean learning to coupon or getting discounts on your utility bill or getting credit counseling. There are so many ways to change your current financial situation. Do not be overwhelmed by the one-size-fits-all strategies that may not be right for you. Remember, you are not your bank account. Money is a tool and you're in the process of learning how to use that tool wisely.
Whatever that next step is will be unique to your situation. It will be different for everyone, and paying yourself first is not the remedy for most situations.
Understanding that money is a tool and does not define any aspect of your value as a human being is the first lesson we need to learn to start a journey to financial health.
About the author
Carmen Lezeth Suarez is the host of All About The Joy podcast. She is an advisor who focuses on financial and organizational management for start-ups, small businesses, non-profits and individuals.
Image via @NappyStock on Nappy
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