Step 3: Treat Every Euro as an Investment

Most of us have heard the old adage, “Pay yourself first.” It has been trotted out so often that it’s part of the financial canon — the de facto Rule No. 1 for managing your money.

It’s certainly sound advice, but frankly, it leaves us Fools hanging: How much? How often? Where to put it? What’s next?

Don’t pay yourself just yet
As far as financial rules of thumb go, we think we’ve come up with a better one. Just in case you overlooked the big, bold headline, we prefer this mantra: Treat every Euro as an investment.

That’s the very foundation of successful investing. We like it because it offers a clear guideline for every financial decision you encounter.

Make one great investment every day
To us, an investment is more than something you make in your brokerage account. An investment is anything that affects the quality of your life. Once the basics are covered — food, shelter, beer — every Euro equals opportunity. And every day presents new opportunities to make your money work harder for you, whether for long-term gain (retirement savings), short-term safety (emergency fund), or immediate pleasure (coffee latte — hey, we’re not here to judge).

After a while “treat every Euro as an investment” becomes second nature. It seeps into your subconscious like a catchy song you just can’t shake. Soon you’ll be looking for “investment” opportunities in every nook and cranny.

But before you set up your brokerage account and dive in, make sure you’re not overlooking a few essential first investments.

Investment No. 1: Pay off The Man. In almost every scenario, there is no better use for your first freed-up Euros than paying off high-priced debt, which, for most, means revolving credit card debt. We’ll prove it.

Consider this example: You have a credit card that charges 18% interest and you have to pay a minimum of €15 per month toward your credit card balance. Now, every month, you have the choice between taking €200 and “paying yourself first” by stuffing that €200 into a coffee can instead of paying down your credit card, or taking that €200 and putting it towards your balance.

The following table illustrates what happens over the course of five years if you decide to keep the €200/month rather than using it to pay down your debt.

Years €200 in Monthly Savings Amounts to … Putting €200 per Month on a Credit Card Amounts to …
1 €2,400 (€2,652)
2 €4,800 (€5,583)
3 €7,200 (€9,088)
4 €9,600 (€13,278)
5 €12,000 (€18,288)

As you can see, “Paying yourself first” points you in exactly the wrong direction in this scenario. By year 5, you’ve managed to save €12,000. However, the interest on your credit card has tirelessly built up the size of your debt.

The save-first approach here has landed you €6,288 in the hole in a mere five years. Compounding interest is a key concept in investing, but when you have debt, that very same concept can work against you.

The bottom line: If you have credit card debt, invest in its destruction.

Investment No. 2: Amass a cash cushion. Stuff happens — stuff that requires money to fix, such as a job loss, car issues, and a really bad haircut. If you don’t have the money on hand, you’ll have to make a crash financial landing, which could mean patching over the problem with a credit card.

Your emergency fund needs to be readily accessible in a simple savings account. Don’t expect to make a killing on this investment. The interest you can get on most savings accounts won’t even keep up with inflation.

How big should this essential investment be? Here are some basic guidelines:

If you … Then your emergency fund should cover living expenses for …
Have no dependents relying on your income 3 to 6 months
Are the sole breadwinner or work in an unstable industry 6 to 12 months
Are retired and living on a fixed income 5 years

Sweat the big stuff and the 80/20 rule

One other thing we want to make clear: Not every “investment” has a Euros-and-cents return. Or, in more practical terms: Go ahead and enjoy your daily latte. At The Motley Fool, we’re hardly advocates of excruciating denial in the name of “investing.”

We’d much rather you spend your energy on the big stuff that really pays off — the 20% of line items on your budget that counts for 80% or more of your spending — things like your home mortgage, cars, travel, insurance, and any four-figure line items in your budget.

Pinpoint your 20%, and earmark a few hours to cut those costs. Then take that savings and put it to work in bona-fide investments — in the traditional sense, that is.

Action: Spend less — instantly. Someone somewhere has probably given you the advice to track your spending for a month to see where your money goes. We prefer instant gratification. Instead of recording your every purchase for 31 days, just do it for three days. In fact, you don’t even need to track it — just consciously ask yourself every time you whip out your wallet, “Is this the best investment I can make with this Euro?” Ask that question more often and we guarantee you’ll start making smarter money choices.