What Does Pay Yourself First Mean?

If you are serious about achieving financial success – this post is for you.   In fact, I’ll go out on a limb here – paying yourself first and investing the money wisely is about the closest you can get to guaranteeing your future financial success. All you have to to do is to put away your savings target each month before you spend a dime and before you know it, you’ll be wealthy.  I’m not kidding here. This is known as paying yourself first and it’s the secret sauce I’ve seen my clients use that sets them apart on their wealth building process.

 

I used to think otherwise.  I thought that people had to jump through complex hoops or have some special luck or talent in order to “make it” financially.  I was wrong.  After 30 years in the business, I know that as long as investors follow this principal of saving first and investing well, financial success usually follows automatically.

What Is Paying Yourself First?

In order to pay yourself first, you first have to figure out how much you can and should be saving each month. Once you do that, all you have to do is set up an automatic investment plan to draft that amount out of your savings account and into your investment account. Then just invest the money. This money movement is done before you spend a dime friend and that’s the whole point. You set this up to happen early in the month before you or anyone in your household has the chance to spend that cash. This way, you have a much better chance of putting that money away and keeping it away – out of your spending clutches.  It’s called setting yourself up for success amigos and it’s very cool.

Why Does It Work?

The reason it works is because we are humans and we don’t think about stuff we can’t see usually.

Sure once you set this up, you can still spend the dough.

If you are determined to get that money for some other purpose, you can.  You could make a few calls and have that money transferred back into your checking account so you could spend it. But you probably won’t do that unless it’s an emergency because it’s a hassle. And that hassle is the beautiful wall that keeps you away from your money so it can continue to grow for years to come. Happy Pilgrims.

Why Doesn’t Everyone Do It?

People don’t pay themselves first because they think they can hit their goals by saving what’s left after their monthly spending.   The problem is, based on my experience, our spending rises as our income goes up.  That means it becomes harder to save even if our pay goes up.

Few people are willing to give up instant gratification (current spending) in exchange for a more secure future. It’s a shame but it is true. The biggest shame of course is, you really don’t have to give up anything important in order to make this work.

As I said, out of sight, out of mind. Of all the people I’ve seen put this concept to work, nobody has ever complained about what they were giving up by paying themselves first. Nobody. Quite the opposite, most people tell me how easy this is to implement and how they really don’t experience a meaningful reduction in their standard of living.

What Happens If You Can’t Keep On Track?

Of course, life happens and it’s sometimes impossible to stick to our financial plans. If your income changes dramatically or you lose your job, you may not be able to keep up with your monthly investment plans. That’s OK. If you find yourself in a situation like that, suspend the monthly “pay yourself first” plan for a while. Re-adjust your spending level and come up with a new auto investment scheme as soon as your financial situation stabilizes.

You may have to cut spending of course and you may have to reduce the amount you save each month. No worries. No matter how much you reduce your monthly savings, make sure you re-implement this as soon as you can. It’s a fantastic habit and the behavior is much more important than the amount. Over time, you’ll slowly build back up.

How To Start Paying Yourself First.

Once you figure out how much you should save, consider how much you can afford every month. Now, cut that number in half. That’s right – half. Start off nice and slow cowboy/cowgirl! You want to build on successes and increase this amount rather than being forced to shave it down.  What I’m saying is, even if you need to save $2000 a month to reach your goals, if you can only save $500, start with $250.  It’s fine.  You’ll eventually build that savings number up.

I always recommend starting off with an amount you know you can afford to save without breaking a sweat. If it’s $10 a month – great. That’s terrific. Build up over time. Paying yourself first takes on a life of its own in my experience. Once people get a taste of this financial coolness, they crave more. (Yes…I am a “pay-yourself-first pusher” but a benevolent one.)

The key to financial success is to not waste time or leave success to chance. One of the most important ways to do that is to set up automatic drafts that take money out of your checking account (where you can spend it easily) and move it to your investment account (where you can’t). Then, over time, slowly increase that amount. My experience tells me that if you do this, the results will astound you in no time.

Are you paying yourself first? If so, how do you embark on this journey? If you’re not doing this, why not? What has to happen in order for you to do so?