Pay Yourself First and Pay Yourself Back

Many of us have heard the savings philosophy of Pay Yourself First. This is where you pay yourself out of each and every paycheck at least some amount by depositing that money to a savings account. Over time, this savings does grow and eventually the goal is that you will not be living paycheck to paycheck.

A follow up to the Pay Yourself First plan, is what I call the Pay Yourself Back.
I was able to put aside money in savings over a long period of time that accumulated to about $5,000. That was and is alot of money, especially if you don't have any other savings. Then the car situation required the purchase of a new to me car. Of course I bought a used car and I was very grateful that I had savings to help me do that.

However, I agonized over spending the very $5,000 that took me so much effort to save. I could of course finance a car and pay someone else about $250 a month (at that time) and not spend my savings. I knew that I was not yet disciplined enough to pay myself back.

A credit union can be a great benefit for people trying to keep their financial house in order. I found a used car for $6200. I took the $5,000 and put it into a 5 year CD at the credit union. Then I borrowed my own $5,000 with my CD as collateral and not my car. The CD loan interest rate was 3% over what the CD was earning. For example, I my CD earned 4% per year in interest, so my CD loan was 7% per year. The 7% rate was 1 % higher than a car loan at the time, but I was also earning back 4% on the CD. Over time as I paid the CD Loan off, I would earn more and more of the interest.

This allowed me to pay myself back over 5 years, but at the end of the 5 years I had a CD now worth over $6,000. I also continued to Pay Myself First, so I had another CD of about $3,000. Now that it's time to buy another car, I will do the same thing all over again. Basically, this is my prepaid car. When I pay off my CD Loans, I can buy another car. If I want a nicer car, then I need to Pay Myself First - more.

This buy my own car plan took a few years to get started at first. But I am glad I did. I just bought my 3rd car. I am happy to say that I was able to borrow my own CD's again and take a little money out of my savings to pay for nearly new car with less about 29,000 miles. I hope to pay off my CD Loans in 3 years this time and not 5, but I have the flexibility to do what I need to do in this very uncertain financial market.

Do yourself a favor and start paying yourself first even if it is only a few dollars a month. You are not just saving money, you are changing your mindset. It won't be long until you can move to the next level and Pay Yourself Back.

If I had financed my car for 5 years through the dealership or through the credit union, I would basically pay for that car twice with the interest going all to someone else. This way, I do pay some interest, but I also get the benefit of earning some interest and not having to discuss my credit report with anyone at the car dealership.

Do the math.

L.Taylor
9/27/2008