The Concept of Pay Yourself First

Steve Cummings

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If you read a lot of investing books or blogs sometimes you may hear the concept of “Pay Yourself First.” I am not sure who coined the term, but as I read the book “The Richest Man in Babylon” I kept hearing the phrase “Pay yourself first.”

This concept was repeated several times throughout the book and it is a basis for smart finances.

Every Month is the Same

Let’s make this a bit simpler. Every month we are often bombarded with bills, expenditures, wants, needs, and self-indulgences. Things cost money, oftentimes we just spend and spend repeating a cycle of massive consumerism.

 At the end of the month, you check your balance sheet, and you find that you just do not have much money at all. This happens every single month.

Maybe you will have less than 5% of your take home pay left, and you wonder, “what did I spend all of my money on?” At the end of the month, you are stuck in the same financial situation you were in before.

Pay Yourself First

When It comes to paying yourself first, you need to set aside the amount of money you want to save then put it away and not touch it. This is quite easy to do.

Let's say you make $2000 a month. If you want to save 10% of that then you make sure that $200 is saved. The easy way to do this is to have an automatic draft to a savings account or your brokerage account to be invested. Then you do not see that money at all, and you will not spend that money. 

Now instead of your budget every single month being $2000, it is simply $1800. You can now base all of your decisions on how to spend the money.

This makes saving much easier if you pay yourself first. If it is getting to the end of the month, and your friends want to go out to the bar for some drinks you can take a look at how much money you have and realize that either you have enough or you don’t.

This also helps break the cycle of the paycheck to paycheck living. You are slowly but surely cutting expenses at the same time as saving. These numbers can grow and grow.

Automate your Savings

In  “The Automatic Millionaire,” David Bach, talks about how people can grow their wealth through automation. We are so programmed to spend that we often forget to save. If you can set-up automations with your bank account you can then set it up to invest for you.

Let’s say you have a 401K with your employer. Instead of each month going in and figuring out how much you want to save, you can set out how much is taken out of your paycheck each month to go into the 401K.

The cool thing is that somebsome companies will give a certain percentage to  match your funding or give a percentage to your 401k. That is free money. You would be a fool to turn down free money. 

With this amount already taken out of your paycheck, you can learn how to live off of less. This will in turn help you to create more wealth. You can then automate your bank to send a certain percentage to your brokerage account that can be automated to invest.

Increase those Savings

All of sudden you are saving 10-20% of your take home pay, and the future is looking quite bright.

The average American saves between 7-8% of their paycheck. That is terrible. What they do not know is that they will have to work longer in life.

If you are saving 10% of your income you will have to work around 51 years of your life to sustain the same life that you are living. 

Mr. Money Mustache has a great article about the “The Shockingly Simple Math to Early Retirement” He took a calculator created by and made his own chart out of it. 

As you can see these numbers may blow your mind. Saving at a 20% rate will get you close to 60-65 years old. Saving at 50% can get you down to 17 years.

Stop waiting, Start Doing

I bring up these numbers to show you that if you can pay yourself first through automation your path towards wealth and financial independence is a much easier one.

If you wait until you are 40 and decide to start uber saving, it will be a much more difficult process. You can do it, but the time is not there for all of it to grow. Lifestyle changes need to be met.

Bills will need to go down. You may just have to cut the cable, eat out less, drink less, and ride a bike.

The Frugal Expat Saves

My wife and I save lots of money. We cannot automate everything since we live as expats, but we have systems in place to not spend too much money..

Our bills are quite cheaper, we eat most of our meals at home, and ride bikes whenever we can.

If you can cut your costs your savings rate will boost, and before you know you will be looking at your finances and realize “paying yourself first is a great way to save money.” If you can take that one step, the next few steps will become so much easier.

Pay Yourself First

Do you pay yourself first?

” Spend less than you make, stay out of debt, and invest the rest”

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