Pay Yourself First: Investing 101 to Retire Earlier

Have you ever wondered if there is a secret the rich know that the average person doesn’t know in regards to building wealth?

Well there is..

But it isn’t really a secret, it’s more a matter of discipline.

The Secret – PAY YOURSELF FIRST

Paying yourself first is a very powerful way to building wealth.

So what does “Paying Yourself First” even mean?

It means that every month before you pay any bills or anything you pay money towards your investment accounts, mutual fund, or retirement accounts.

Your very first check you write each month should be to yourself.

Yes. Do it. You’ll be very thankful when you are retired at a much younger age.

Most people instead follow this order in allocating their income: bills, fun expenditures, savings

Why would you want to wake up early in the morning 5 days a week, 4 weeks a month, 12 months a year, 40+ years of your life to go do something you don’t enjoy as much as you enjoy the free time on the weekends but then not pay yourself first with that hard earned money you spent all week trying to earn.

People pay everyone else first in their life. They pay bills, creditors, the government and then if money is left they pay themselves.

If you pay yourself first instead it looks like: Savings, Bills, Fun expenditures

A lot of people who choose to save last, have no money left to save after all their expenses each month and therefore are not building their wealth.

The wealthy people in the world understand this and save first, then pay their bills, and then any money left after can go towards other expenses.

A common example is all the starbuck zombies out there who get starbucks every morning.

Yea the coffee is nice. It wakes you up so you have energy to go to your job and survive a long 9-5 day.

But water is free… and healthy.

That “craving” expense adds up over time and actually costs you more money than the coffee price you think you are paying because it’s costing you lost income. The lost income that could be coming from your investment accounts had you drank water instead and earned interest on your coffee money in a mutual fund.

This goes for any common expense you habitually rationalize the need for (fast food, movies, etc). Lost potential income on top of your expense.

You don’t have to eliminate starbucks completely. Just pay yourself first and then left over money can go towards the coffee, candy, shopping, etc.

Here’s an example of paying yourself first:

Person A decides to pay themselves $10 a day, $300 a month

That breaks down to $150 out of each pay check.

Not tough to do. $10 a day.

You could cut out that $3 coffee or drive less, saving a few more dollars in gas money. $10 is doable.

Anyhow that $300 that Person A pays itself each month invested at 15% return will build $1 million dollars of wealth in 25 years time thanks to compound interest.

Save $20 a day you’ll cut 4 more years off and achieve the 1 million mark in 21 years instead of 25.

Those of you who are 18 and 19 reading this, imagine a million dollars in your account when your 40-43 years old because you started paying yourself first when you were young unlike most people.

A lot of older people say they wish they had started saving earlier. It’s usually one of the first pieces of advice they give to the younger generation. Save early and enjoy retirement early.

Ultimately paying yourself first is building yourself a financial nest. It’s up to you how long you want to wake up and go to work instead of sleeping in and enjoying time freedom.

You work hard for your money so pay yourself and the money will work hard for you.

Don’t be so quick to give it away to everyone else.

How To Pay Your Self First?

  1. Create a bill to yourself, charging a fixed amount every month that you can afford for the next 6 months to a year.

Maybe start with 1% of your income if you’re really in tough financial times already but if you’re living comfortable and spending on fun activities then set a higher percent of your income or a fixed amount like the $300 a month.

This bill to yourself is the first bill you will pay every month.

Even if you come up short for paying your other bills still pay yourself first. Write down how much money short you are and find a way to get the extra money that you need to pay the rest of your bills. Pick up another part time job or really analyze your lifestyle and find some kind of expense to cut out.

  1. Set up an accountability contract with a friend that allows them to fine you every month you don’t pay yourself first or fail to pay yourself the set amount you committed to.

It will force you to take this more serious and be disciplined until you have built up your habit like the rich have.

You should never miss a month though if you learn to budget your money properly and cut down on expenses you don’t need.

  1. Make it automatic, have the money taken out of your paycheck electronically and placed into your savings account or investment account.

This way you will never see that money and be tempted to spend it.

  1. Set up a brokerage account with a financial adviser and let your money go to work for you in stocks and bonds.
  2. A retirement account like a Traditional or Roth IRA is a very smart option to pay your money to especially if you’re young.
  3. If your employer matches 401K contributions then take advantage because that is free money. Max out your 401k payments by paying the max to yourself in that account that you are allowed. Your company will also pay that amount to your account.

Free money.

The left over money (if you maxed out) can be invested in a normal brokerage account.

  1. Have money automatically transferred to a savings account with a high interest rate. Savings accounts are good for the shorter term like if you plan to purchase a house eventually but they generally have low interest rates so you won’t grow your money as big or quick as if you invested it instead.

So my challenge to you is to sit down and write down your list of monthly expenses. Everything you can think of that you spend money on. Here is a list to help you in this article on budgeting.

Analyze your list and circle the absolute necessary expenses (should be very few)

Total up the cost of your other not-so-necessary-expenses to realize how much money you could be paying yourself instead of someone else.

Come up with a dollar amount you want to set as your bill to yourself and the left over amount can be used at your discretion. Good luck!

Resources

For more tips, tools, and time-savers, visit our Resources Section through the menu bar at the top of the page or access each of our resource pages through these individual links:

Be great today,

Nick Foy

P.S. Have you considered starting a business at low cost to earn passive income? Check out my articles on the different ways to make extra income on this page.

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