Step 3: Treat Every Dollar 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 dollar 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. (Plus, "Don't buy stuff you cannot afford" was already taken.)

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, workplace-appropriate attire -- every dollar 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 (mocha latte -- hey, we're not here to judge).

After a while "treat every dollar 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 dollars than paying off high-priced debt, which, for most, means revolving credit card debt. We'll prove it.

Consider the difference between setting aside $200 a month and coming up $200 short and covering it with a credit card. After five years of that -- assuming you simply stuff your $10s and $20s into a coffee can, your credit card charges 18% interest, and you pay a minimum $15 a month toward the balance -- here's where you'd be:


$200 in Monthly Savings Amounts to ...

Putting $200 per Month on a Credit Card Amounts to ...
















As you can see, "Pay yourself first" points you in exactly the wrong direction in this scenario. Stashing your cash in a savings account earning nearly 20 times less in interest than you're paying on those lingering credit card balances leaves you $6,288 in the hole after five years, and you've paid nearly $7,000 in cumulative interest charges alone.

The bottom line: If you have credit card debt, invest in its destruction. Use the "Should I pay off debt or invest in savings?" calculator to see how much money you can save by making the investment to pay off the plastic.

Then, head to's credit and debt area where you'll find a handy "60-Second Guide to Getting Out of Debt" and a step-by-step action plan in the "How-To Guide: Reduce Your Debt." Best of all, you've got a built-in support network ready to answer questions, offer tips, commiserate, and cheer you on at the robust Credit Cards and Consumer Debt discussion board.

Investment No. 2: Amass a cash cushion. Stuff happens -- stuff that requires money to fix, such as a job loss, car transmission issues, and a really bad haircut before your high-school reunion. 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 dollars-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 and extreme penny-pinching 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 mortgage, cars, travel, insurance, and any four-figure line items in your budget.

Free online budgeting tools like (a Motley Fool partner) and give you an instant snapshot of your spending and saving. 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.

Not coincidentally, making those first stock market investments is the topic of the next step. And for many of you, we're about to unearth an investment that is guaranteed to double a portion of your money. Really!

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 dollar bill?" For a helpful reminder, sheath your credit and debit cards in our "Spend Less Patch." We guarantee you'll start making smarter money choices.

How to simplify investing -- in just 30 minutes a day
It’s roughly the same amount of time it takes to walk a quarter-mile on a treadmill… whip up dinner… read your children a bedtime story. And it’s how little time it takes to learn everything you need to know to begin investing in the stock market. (Which -- if you’re like most of us -- is something you know you should do… but keep putting off.) The Motley Fool’s Director of Investor Learning is eager to help you start down that venture -- absolutely FREE -- in just 30 minutes a day, for 13 days. Simply click here to get started.


Read/Post Comments (32) | Recommend This Article (580)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 07, 2010, at 2:50 PM, ServusDei7 wrote:

    Credit cards balances should always be paid off entirely every month. However, if you have student loans or other loans that charge less than 5% interest, it would make sense to delay paying off the loans and use the money to invest in stocks instead, if valuation of stocks are low enough (P/E below 8 is safe enough). If stocks make 10% a year, and your loans only cost 3% a year, you make 7% a year by borrowing. However, if valuation of stocks are high (P/E > 20), I would pay off ALL loans first, because the market will probably head lower to give you a better buying opportunity.

  • Report this Comment On October 07, 2010, at 9:45 PM, StraitBiznes wrote:

    My mother is in tremendous credit card debt right now, and she is slowly digging her way out of it. I have learned a lesson about high interest debt by watching her and living through some of the aftermath.

    I am going to go through these 13 steps relatively slowly in order to ingrain the information. I think investing is more like a marathon than a race, like most things in life.

  • Report this Comment On December 24, 2010, at 4:30 PM, jasontylers wrote:

    I've recently found myself in the situation with student loan debt. I don't accumulate credit debt and have my first job out of college. What brought me to this site was the seemingly incredible amount of knowledge on investments. My search for information lies mostly in my need to learn more about the stock market and investing in general.

    I'm learning all I can from the site but the help from the users is great! Anyone willing to help point me in the right direction is much appreciated.

    Love the site so far!

  • Report this Comment On January 13, 2011, at 9:23 AM, fysfil wrote:

    I have a question about the time that is recommended for emergency funds for a retiree: five years. I would like to know the origin of that time, please....and can some of that money be available in the form of "unused" home equity loan?

  • Report this Comment On February 16, 2011, at 10:45 PM, AT4stockguru wrote:

    Simple rule for any loan for that matter..use it if the rate of interest is VERY LESS thats less than 2-3%

    this allows you with funding your needs like House, Car, Stocks, travel etc. I think getting funds/loan is always good but piling it up out of ignorance is dangerous

  • Report this Comment On February 18, 2011, at 3:05 PM, mountain8 wrote:

    AT4 - Sorry but your comment went right over my head. I am a writer but I can't seem to gather your meaning. Could you review and expand please.

  • Report this Comment On June 02, 2011, at 7:18 PM, pypsa wrote:

    would like to know what is shorting a stock

    and what is limit

  • Report this Comment On January 13, 2012, at 7:18 PM, bigjay455 wrote:

    ill stay with old cars

  • Report this Comment On March 27, 2012, at 12:28 AM, weirdcity wrote:

    I don't get the 20/80 rule... can someone explain it to me like I'm a five year old.

  • Report this Comment On May 15, 2012, at 2:22 PM, ButtahNBred wrote:

    "(P/E below 8 is safe enough)"

    Can someone explain what P/E stands for and why below 8 (I'm guessing percent) is safe?

  • Report this Comment On August 18, 2012, at 11:14 AM, NickD wrote:

    i will never own a credit card

  • Report this Comment On September 07, 2012, at 12:41 PM, beth1992 wrote:

    Ditto on the question about the need for five yrs worth of emergency funds. Can't see myself ever doing that. Way too much waste of useful funds. Where did that number come from? Is it assuming no income from pension/ social security/ dividends?

  • Report this Comment On November 27, 2012, at 3:31 PM, NickD wrote:

    Say you have $100,000 and let's say you pick a stock like Walmart and you only invest $10,000 when it drops 3% and than hold it Until it turns a 0.20% profit that is $20.00 for virtually no risk Walmart almost never goes down and stays down look it up.

  • Report this Comment On January 13, 2013, at 10:25 PM, Katbaloo wrote:

    I too am going to take this info in slowly. I need to make up for lost time.

    On credit cards..... I accidentally learned the formula for never having to pay interest. It's a game!

    Thank goodness for my last layoff in the 90's with a year to prepare for it. (paid off most debt and headed back to school). By the time I was laid off my credit score was sky high (sacrificed for a year) & the low to zero interest rate offers were rolling in even though I was jobless! I still use a credit card for emergencies and pay them off as soon as possible but .... I never have to pay interest..... It's a game and it's staring you right in the face.

  • Report this Comment On March 03, 2013, at 5:54 AM, mjspina wrote:

    I can understand the point about paying debt before saving, since debt is usually always at a higher percentage, but there is a fundamental problem with this ideology. Most people are never free from debt. Lets say you go to college. That racks up money you'll be paying back for a while. Then, you're going to want to buy a car. Keep in mind, before you buy a car with credit, you're going to need to use a credit card, then maybe a personal loan or two in order to build up your credit before qualifying for a sound auto loan. A little later in life, you're going to want to finance a house, hopefully not while you're still paying off college and that car you bought. You'll get married, have a kid, and now your bills are higher while still paying off the aforementioned. My point is, if you're ONLY putting your money to bills and not to your life, you're going to be waiting forever to put cash in your bank. You need to treat your investments like bills as well. Credit = Time to pay money. Use the time you've been allotted wisely.

  • Report this Comment On May 26, 2013, at 7:25 AM, The1MAGE wrote:

    mjspina, it is true that most people will not be free of debt, and that is not a problem with the pay debt first ideology, but with the people not paying it off.

    As a result of our really bad financial education, people believe that debt is a good thing, and having a credit card with a massive balance means you have made it.

    I spent a few years paying down our debt right before the 2008 crash. As a result my hours went down, and so did my pay. I was making about half what I was before. But that was right when paying off our debt was really kicking in. Even with our "financial trouble" we were still paying off debt like crazy, and our bank account kept growing. (I need to point out our income was below average for a couple before the hit, so we were not doing this with doctor incomes.)

    I almost felt guilty that I kept hearing how many people were struggling while we were doing better then ever. And our debts kept getting paid off.

    We did focus on living below our means, and bought cheap cars for cash. We also pretended we still had a car payment, and stocked away funds that paid for our trade ups. (It's surprising how quickly that builds up when your not paying interest.) I should mention I do not buy new cars. I would rather let somebody else take the depreciation hit. I guarantee any extra maintenance is a lot cheaper.

    One thing they didn't take into account in this article is that the return on paying down debt is tax free. Maybe you can defer your taxes, but eventually you will have to pay them. I know with an additional part time job, I would have to make over $750 a month to make $500 after tax.

    So every dollar in reduced payments is like $1.50 in taxable income.

  • Report this Comment On January 07, 2014, at 8:54 PM, Heidikitty wrote:

    Credit cards are great as you do not have to carry large amounts of cash and you can easily keep track of your spending. Check every month and see where every penny went while paying off that card every month. They have an automated service and you can get recent transactions every few days thus saying I need to cut back or I can buy that stock I have had my eye on. It really feels good at the end of the month when you have more monies than debt.Some cards offer good incentives like free hotels for that vacation you have been saving for.Try it for a month or two.

  • Report this Comment On January 07, 2014, at 8:54 PM, Debranette wrote:

    I love the fact that I am debt free, apart from my house which I am now paying off at break neck speed because I am debt free. It has been hard work but well worth it. It has taken me a few years to get here and I know it won't always be like that as I start investing in property also, but it was really hard to start with but now, it gets easier and earier to not spend your money on Doodadas as Rich Dad calls them.

  • Report this Comment On January 24, 2014, at 11:56 PM, sonic103 wrote:

    @Debranette: Are you putting more money into paying down the principal of your house? How long will it take you? How can you invest in other properties while you do this.? My goal is to pay off my house as soon as possible but it will take several more years. I would like to invest in properties but I don't think I can do both at the same time. Having no debt whatsoever is more important than worrying about how to pay for an investing property if a renter isn't good at paying. Maybe I just have a one track mind.

  • Report this Comment On February 03, 2014, at 7:41 AM, habibkhan wrote:

    invest $10 here and earn more money this two site are recommended. Just click on the links and register for free and the invest here. Here you will buy rented referrals they will earn for you. Even you can earn also.

  • Report this Comment On February 04, 2014, at 7:24 PM, divingfool62 wrote:

    ok so, we have a three digit mortgage, no CC debt, one car payment, and I'm 4 years from retirement. wife is already retired. We are (still) carrying student loans for one of the kids to the tune of roughly 1000 a month at 2.9%.....How do we pay off the student loans so we can invest the money elsewhere (stocks?) I don't think we'll see a return on the investment in time !

  • Report this Comment On April 04, 2014, at 6:59 AM, TheGhostMrsMuir wrote:

    Recovering now from a horrendous hit in 2008 when my business failed (evaporated is more like it), my ex left me with two teens heading for college, $100,000 in debt and a foreclosure. Went through savings, retirement and everything else in 3 years.

    3 years ago I started a new business which has doubled and tripled its size and income each year (a very Foolish business indeed) through hard work and smart moves and is now beginning to return big income, all invested in Foolish ways. We've been able to clear all but the foreclosure so far....

    As for credit cards? We've finally learned how to make them work for us by using them for EVERYTHING (one business, one personal) and paying them off every single month. Heck, sometimes we pay them off up to 3x a month and they each have a $20,000 limit! That's a lot of 2% cash back! We put up to $30,000 a month on the business card. We purchased three vehicles last month, all on the cards later paid off with our 2.5% car loans. We figured we were getting the loans anyway, why not shuffle a bit and get some cash back? Saved us more than a thousand dollars!

    We are an extreme case I think but we made more than $4,000 last year in 'cash back'. Probably going to double that this year. That's a decisive PLUS in the financial column!

  • Report this Comment On April 04, 2014, at 7:05 AM, TheGhostMrsMuir wrote:


    I can see one reason to have 5 years in liquid assets when nearing retirement I think; if the market DID turn down and you were invested more fully, would you need to sell equities at a loss or less profit to live? Would you be able to ride it out?

    Just a thought....

  • Report this Comment On July 14, 2014, at 1:24 PM, eugened314 wrote:

    Thank you for sharing all these great tips. I recently ran into some extra money and am thinking about investing it. I really appreciate the information on amassing a cash cushion. After reading your article I know exactly how much I am going to invest.

    Eugene Dean |

  • Report this Comment On December 28, 2014, at 5:50 PM, DonLemongello wrote:

    You can also start out a small equity loan against the equity your home, if you own a home and/or if you have a bit of equity built up-for just the amount that you owe on your higher interest credit cards to pay them off in full, now you will pay a lot less interest toward the Equity loan and this savings can help out toward new investments as well.

  • Report this Comment On January 17, 2015, at 12:07 PM, Snitker wrote:

    I have 3 loans and a high credit card debt. I believe going threw these steps will help me pay them off faster and allow me to have a better quality of life that I want.

  • Report this Comment On February 02, 2015, at 8:13 AM, WickedWillie wrote:

    The best investment advice can be extrapolated from observing bums begging on street corners, it’s: “Don’t go there!"

  • Report this Comment On February 18, 2015, at 4:11 PM, gallykg wrote:

    I have about 23K worth of bad debt. 3300 in savings and a 1400 tax refund. I want to pay off debt for sure but feel like I need to be investing. Hard to imagine getting 3 to 6 months worth of salary in my savings account.

    What is an acceptable amount of savings while paying down debt?

    Should I use the tax refund to get in the stock market as a long term investment?

    The debts are on 0% cards and leftover from house remodel that was twice the expense we anticipated.


  • Report this Comment On May 05, 2015, at 8:55 PM, marida wrote:

    I read somewhere that putting money into a savings account actually makes you lose money due to inflation.

    If you get 0.1% interest and inflation is at 1.7% per year then that would mean you actually lose 1.6% per year for just having money sitting around in a savings account.

  • Report this Comment On July 06, 2015, at 2:28 PM, plata wrote:

    Regarding emergency funds: I am living on a fixed income (Social Security) so can anyone tell me why I would need 5 years of living expenses in a savings account? Sounds like way over kill to have that kind of money tied up in a loosing situation as the post above points out.

  • Report this Comment On August 12, 2015, at 3:59 PM, Hendrickson71 wrote:

    My uncle always said that one should think like a bank:

    1) Always track your transactions - mint us a great source.

    2) Make smart decisions - bank is always rigorously research before it gives its money.

    3) Cut wastes, but do it smart - you should exhaust yourself if a cap of latte makes you happy buy

  • Report this Comment On August 31, 2015, at 5:11 AM, adeneve wrote:

    Someone above stated that they couldn't understand what the 80/20 rule is. I also couldn't get the gist of it even though I read it over a few times. I searched for the term, found it's definition and realized there is no way to learn the meaning of the term from the above discussion. I'm assuming it is the Pareto Principle: "A rule of thumb that states that 80% of outcomes can be attributed to 20% of the causes for a given event". Please go to this link for a brief video description of it's meaning. It appears to be an expression used in business circles and was new to me as well.

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