Paying yourself first is a concept that I first read about in “The Richest Man in Babylon” By George Samuel Clason. The idea is that you must put 10% of your earnings away for investing BEFORE doing anything else with your paycheck. When most people see their paycheck deposited the immediate response is to pay all of your bills, buy groceries, buy that car part you have had your eye on all month (guilty), and pay for any other expense or whim that comes to pass. At the end of the month, we might put whatever is left into a saving/investment account if we feel compelled to do so.
The problem with this course of action is that we seldom have any money left over to save. What little money we might have is usually spent on pointless expenses such as fast food or energy drinks.
What it means
Paying yourself first means that immediately upon receipt of the paycheck you must put 10% of your paycheck into a savings/investment account. That way you will guarantee 10% savings each month, and force yourself to be a little more frugal with the car parts, fast food, and energy drinks in order to pay bills and buy groceries.
I understand this does not sound super appealing at first glance, but seeing your bank account grow into a large investment fund is extremely exciting, and will change your life!
10% of your paycheck may appear to be a large amount at first glance, but a couple of hundred bucks shouldn’t be noticed if you adjust the pointless expenditures ever so slightly. A trick for military members is to log into your MYPAY website and set up an allotment to a different bank account, or different bank (even better). This will ensure that you pay yourself first every month, and make it harder to justify pulling money out of the account on a whim.
While this savings account is growing into an investment account you should be actively learning about the different avenues of investment, which we will discuss in more detail as this blog develops. That way you don’t make the mistake of blowing your savings on a “solid investment” that somebody sold you on, or a scam.
Personal Capital is my favorite way to track all of my assets!
Perfect for Barracks Marines/service members
Those service members that live in the barracks, and do not receive housing allowance often believe they make less money and have less money to save. Although they might not collect housing allowance the reality is that there is an awesome, and seldom discussed advantage to living in the Barracks.
You have virtually no bills! Imagine the freedom that comes with having a room provided, food provided, utilities provided, living within walking/cycling distance of work! Those of us lucky enough to learn about paying yourself first while still in the barracks (I wasn’t this fortunate) could easily save 20, even 30 percent of your paycheck without issue!
download my FREEÂ E-Book to learn how to do this efficiently!
Putting the extra money aside will grow your investment fund 2-3 times faster, and the compound interest from your investments will provide you with a large amount of wealth. All of this at the same age that the average American is just getting started with their job and beginning to pay off student loans. This gives you a huge financial advantage over your peers, and if used correctly will set you up for financial success for the rest of your life!
Don’t follow my lead!
I spent the good part of my first enlistment buying tattoos, cars (and car parts), a Harley Davidson, booze, and guns (bad debt). Some of these items still hold sentimental value to me, but the reality is that I could have bought them more intelligently. I wish that somebody had told me to pay myself first, and given me a class on investing and setting up allotments in order to avoid spending unnecessary money.
There is nothing wrong with buying these items, and I’m not advocating against purchasing a vehicle. I would suggest buying a fiscally responsible vehicle, and only drive it on weekends. That way you spend almost no money commuting and are able to pocket that much more in savings.
Scott Trench talks about this in his book “Set for Life” which is an incredible book about saving/investing. Scott takes a different approach to these topics with the first third of his book spent on reducing costs, rather than increasing income. The true benefit to this, as he points out, is that additional income is taxed accordingly, but every dollar saved by reducing expenses is a full dollar in your pocket.
It never hurts to earn a little extra money either!
Saving is bad
Saving is different from investing! Many people mistake having money in savings as a step towards financial wealth. Understand that money sitting in a savings account is losing value due to inflation at a faster rate than it is earning interest. Over time your $1000 in savings will slowly lose value if it just sits there.
Saving isn’t always bad
This is not to say that you should delete any savings account you have, but rather to ensure you understand the difference between savings and investments. The reason that a savings account is valuable is for emergency funds, and for this reason, I believe it is acceptable to have money sitting in a savings account.
An emergency account should have enough cash to be able to fund all of your expenses for 90 days to a full year. As a single person, I would say 90 days is adequate, but if you have a family it is probably a good idea to get closer to the one-year emergency savings fund.
The amount saved is sort of personal preference, but I highly recommend an emergency fund large enough to keep the bills paid until you are able to get healthy or find work again (which may not be immediate).
Saving capital to invest is okay
The only other acceptable reason to have your money sitting in a savings account is in order to build capital for your initial investments. However, there are short-term places to store your money that will still earn interest rates that outpace inflation. Some of these are short-term Certificates of Deposit and index funds. Be sure that you do your research, but these can be good places to park your money while building capital, and still earn some interest.
Investing
Meat and Potatoes. Investing is how you make your money work for you. This is a complicated subject that we will get into in much more detail in the future, but I will briefly touch on some of the main avenues for investing.
Real Estate – rental properties, fix/flip, development, commercial rentals. Real estate is a tangible asset that you can purchase, and add value to.
Stocks – Investing in companies, or funds, that you believe will experience growth over the next month, year, decade, century, etc.
Businesses – With the development of crowd-funding it is possible to invest in companies that are not yet publicly traded on the stock market. Buying equity in companies, or products, that you believe will be innovative and successful.
Thrift Savings Plan
I would be remiss if I didn’t mention the Thrift Savings Plan (TSP). This is a 401k/Roth retirement account that the military, and federal employees, utilize. The TSP is the best retirement account on the market! They have extremely low fees, and well-developed funds internally.
These funds have been set up so that an experienced investor can adjust which account his money is in, or an inexperienced investor can pick a lifecycle fund for the year he plans to retire and let the experts adjust their diversification.
This is a great opportunity to stash an additional 5-10 (or 50) percent of your paycheck away before it ever hits your checking account to be spent (they pull directly from paycheck).
Blended Retirement System
With the new blended retirement system that the military has adopted it would be absolutely foolish not to invest a minimum of 5% into the TSP because the government will match up to that 5% contribution. This means that for every 5% you deposit, you will receive 10% of your paycheck in the retirement fund. Take advantage of the “free” 5% bonus on your salary, and save this money for the long term. The TSP will grow into a valuable nest egg in your retirement.
As we grow and learn more about investing together my hope is that you will never need to take withdrawals from the TSP, and can instead pass it to your children or grandchildren as a nest egg for them to begin investing in their future.
Conclusion | Always Pay Yourself First
The moral of the story here is to pay yourself (put money away for saving/investing) before you pay the bills. This is the fastest way to begin building wealth for investing because it will change your mindset, and help you begin focusing on the more important things that your money can be used for.
Invest in yourself, and invest in your future, NEVER forget to pay yourself first!
What advice do you wish somebody had told you about money as a child?
5 Responses
This is truly helpful, thanks.
Anytime, glad you found it useful!