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The Journey to Riches: Paying Yourself First

Target group: Individuals looking to enhance their wealth

Many financial experts often recommend people to “pay yourself first.” So, what does this actually mean? Should you spend all of your money on yourself? Should you save every last penny you have? Why should I even care?

I had a hard time understanding what it means to actually pay yourself first. I looked at it from a responsibility standpoint. I initially thought it meant to be irresponsible and just splurge a bunch of money on yourself before you paid your bills. This concept changed when I read the book “Rich Dad Poor Dad.” Ever since then, I now “pay myself first” and this helps me achieve my investing and saving goals faster. Before I pay any bills each month, I ensure that I have reached my personal financial goals.

What Does It Mean to Pay Yourself First?

Paying yourself first simply means to set aside a portion of your income before paying any bills, loans, etc. This allows you to meet your personal financial goals before you pay anyone else. You’ll be surprise at what impact this can have! When I started paying myself first, I kept stashing money away into my Roth IRA account up to the maximum amount allowed. I started putting my investment goals over my “bill payment goals.” This does not mean that you should stop paying your bills on time, which I believe is a common misconception. You should always pay your bills on time, but before you pay them, ensure that you have met your personal financial goals. A personal financial goal of mine is to ensure that I save at least 20% of my income towards retirement each year. By paying myself first, I ensure that I reach this goal each and every year. I could worry myself about paying off some loans, but instead, I’m paying myself first by reaching my 20% a year retirement goal before anything else.

How Can You Pay Yourself First?

Luckily, paying yourself first has become much more practical due to direct deposit. Money is directly deposited into a person’s checking/savings account before it goes anywhere else. The true question is: “what do you do after this money has been deposited?” The first step is to set goals. If you have no personal financial goals, it’ll be very hard to pay yourself first and have the peace of mind of financial security. You should always have these goals in mind as you’re allocating your money each month. The next step is critical! You MUST have a budget at all times! Without a budget, you have no foundation. And just like a house with no foundation, it will eventually collapse. For more details about the budget, check out my article titled “Ballin’ on a Budget.” Always keep in mind that wealth building takes discipline. You must be proactive in your personal finances. With a solid budget and good financial goals in mind at all times, you will always be financially secure.

One way to become financially secure is to put your needs over your wants. You need to live somewhere, but you want a really big house. You need to start saving for retirement, but you want to travel the world. Notice the difference. Needs do not equal wants. Never live below your means, but you must put needs over wants if you want to be financially secure. Another critical step to paying yourself first is to include saving/investing as part of your monthly budget. You must have a goal in mind at all times, however, of how much you want to save/invest each month or over a specified period of time. A good rule of thumb is to save enough until you have three-six months’ worth of savings (i.e. necessary monthly expenses). This does not necessarily have to be money in the bank, although some of it should. It could be a really safe investment such as a short-term note (i.e. Treasury bill). This three-six months is officially your emergency fund. Any excess cash flow after this three-six months has been accumulated can go straight to investing. A good practice includes investing at the same rate you were saving before you achieved your three-six month saving goal. Another good practice is to get a credit card that is used for emergencies only and maintains a high credit limit. I personally use this as part of my “emergency fund.”

Most people I’ve come across say that all their money is going towards bills. Two ways to correct this are to increase your income and/or reduce your expenses. Another secret way, however, is to find ways to make money with no money. What in the world does this mean? It’s a fancy term known as leverage or “Other People’s Money (OPM).” This is where financial education is critical as this step is not meant for those that can’t properly manage money. I rarely ever use my own money now a days. I borrow money (i.e. from a bank) to invest it and use my investment earnings to cover my bills. This is a highly sophisticated strategy and you must be comfortable handling money to be successful with this strategy. Any remaining profits that I make from investing are also further invested to earn more money. This is one way that many millionaires got to where they are today. They didn’t use their own money. They used OPM. This is how the rich keep getting richer. Keep in mind that you must have sound financial education to master this strategy. Remember, I rarely use my own money now a days. I use my investment earnings to pay off my luxuries such as my condo and my car. As a matter of fact, my investment earnings are now more than my salary at my previous job and it’s tax-free (by using the right tax strategies). You too can master this OPM strategy.

Another way to correct the problem of “money only going towards bills” is to cut down on unnecessary expenses. Remember needs vs. wants? I can go on all day. You can truly live a great life by simply living within your means and not overspending. You also must want to invest as bad as you want to pay bills. Always keep your personal financial goals in mind! Understand that the stock market is not the only investment out there. There are so many great investments out there right now, which would be only right for a future article, although I did write one previously titled “Money Making Money: Investment Strategies.” Another great investment I made this year was in my financial education. I now can’t put down a personal financial book (or audiobook). I’ve read nine personal finance books so far this year. Always remember the difference between risks and gambles. Risk is calculated. Gambles are not. Start making calculated risks instead of mere gambles.

Self-education on your finances is the best way to go instead of relying solely on a financial advisor, or even worse, not having someone to help at all. Read books (some of them are free), attend seminars/workshops, seek coaching, and think and grow rich (one of my favorite books). Building wealth is not very difficult; it mainly has to do with your mindset and how well you’re taking advantage of your resources. It’s perfectly fine to seek help. Remember that you will only be as rich as you picture yourself out to be. You must make wealth-building a priority in order to become rich. Paying yourself first is one critical step to achieving this goal.

If you have any questions, please don’t hesitate to reach out to me.