Pay yourself first

One of the most effective ways to build assets is to pay yourself first. The concept applies to reaching any financial goal you may have, whether it is saving for retirement, building an emergency fund, saving for a car, building an investment account, or really anything. I am a huge believer in this concept.

So what does pay yourself first mean?

It means setting aside money from each and every paycheck before you pay any other bills. The critical word here is BEFORE….you have to set aside some cash otherwise the entire concept falls apart. So before you pay any bill or expense you have for that month, or before you go to dinner or “treat yourself” to whatever, set aside some money each and every time you get paid. Save/invest it, and do not touch it. Ideally you want to automate this process by maybe having withdrawals from your employer into a 401K, investment account, emergency savings account, or any other resource you may be using to save.

I started doing this when I was a paperboy, and each time I collected money from a house on my route (which was done door to door back then) I set aside some of that cash, and shortly thereafter invested it. I started to build a stream of dividends, investments, and other sources of income by having my money work for me. This concept of paying myself (which my mom told me about way back then), helped set me up for the future. It instilled in me a habit of always paying myself first no matter the job I was at (even a paperboy!), saving and investing. It became a habit (see below). It was extremely satisfying to see “my money work for me”.

Once you set the money aside, and have paid yourself first before any other bills, use those funds which you set aside (paid yourself) to meet your financial goals. If your goal it to buy a house, then put that money into a dedicated account for the house. If your goal is to save for retirement, then invest it in your 401K or IRA or other retirement account. If your goal it to build long term wealth, this approach will help. Put this money aside and never tough it no matter what. In effect almost pretend it is not there.

Paying yourself first forces better financial decisions around spending

What normally happens is people do not even notice the “missed” money in which they paid themselves. It in effect forces you to live smarter and often make better financial decisions, all the time while your money is hopefully working for you in the investment, savings, account, or wherever you saved it. The money can compound and grow, as we have reported on.

Paying yourself first may leave less money/cash in your pocket for that week or pay period, but that is OK. That is what it the concept should do. Then you will be forced to think more and adjust your spending accordingly. For example, if you pay yourself first, maybe when the time comes to buy that $6 latte at Starbucks you will realize “Hey, I do not have the same amount of money in my pocket this week” as the few dollars you normally would have had been set aside in your investments from the pay yourself first approach. Then maybe you will pass on that $6 latte, or maybe buy a $3 coffee instead. You will soon automatically budget and treat your money more appropriately.

Discipline becomes a habit

You need to be disciplined to pay yourself and follow this rule. When it comes to financial or career matters (working, investing, launching a business, etc) I am a big believer in discipline. “Force” yourself to do it every time, and eventually it becomes a habit. Discipline is a trait that most successful people have, whether they are in business, actors or actresses, singers, or whatever. Build a habit of paying yourself first. On a side note, discipline leading to habits really applies to anything in life. People trying to lose weight, someone learning a new skill or hobby, etc. It starts with discipline to do the activity, then it becomes a habit.

Now we understand the concept of paying yourself first can be difficult for some people to do or comprehend, especially for families who are lower or even moderate income, who may be living paycheck to check. While it can be difficult, it can still be possible to pay yourself no matter what your income is. Even if you live in poverty just set aside a dollar. Or set aside some “cents” each pay period. Just set aside something to get into the discipline of doing this.

Then, as time goes on, if you are in the habit of paying yourself first (no matter your household income) ideally over time you can increase the amount saved. Even a low income family maybe starts with a dollar each paycheck. Then they see maybe saving a $1 doesn’t “break the bank” so they eventually increase it to a $1.50, then $2, etc. Then, over time, paying yourself first can add up, even for families who are struggling just to pay the bills.

Benefits to paying yourself first

It forces you to put your own middle to long term financial needs and goals first. It forces savings, investments, wealth building, contributions to retirement, and looking out for your financial future. Anyone can pay themselves first, and it is never too late to start. So go ahead, and start setting aside some of your next paycheck. Save it, invest it, or whatever. Pay yourself first, and take care of your financial future and goals.

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