Pay Yourself First
Pay Yourself First
The first, and perhaps most important thing to learn in financial
planning is the need to pay yourself first. While the saying is simple, I admit
the action is hard. It takes a lot of will power and self-discipline. It means
“living below you means”. You need to make it part of your core
belief system. If you start when you begin your first job it is much
easier, just treat it as another tax, only you are the sole beneficiary of that
tax. If you never get used to spending the money you will not miss it. This is
why I always enjoy talking to and educating young people about putting together
a financial plan. If you are joining me latter in your life that is ok, it is
harder, because you are used to a certain standard of living, but you still
need to start. It is a onetime adjustment and the sooner you make it the better
off you will be and the smaller the adjustment. If you wait until you are
about to retire you will be forced into a huge adjustment and change in your
standard of living!
I often hear people say they do not make enough to save to which I
answer baloney. While it is true that if you make less you will save less,
in real dollars terms, you can still save the same percentage. The
target should be at least 20% of your take home pay regardless of how much you
make. This applies to anyone making more than twice the poverty level which is
$15,730 for 2 people in 2014. So if you make more than $31,460 and have 2
or fewer people in your household you should be saving at least $6,000 a year.
The next question I get is, how do I do that? Easy you start
by paying yourself first. After you do that you figure out what else you can
spend and budget accordingly. You have to understand the
difference between wants and needs. You have to believe saving is a need, and the rest will fall into
place, even if that means giving up some of your current wants to make sure you
can take care of future needs and wants.
I am often asked how some old person with a blue collar middle
class job accumulated so much wealth and it is often suggested it was so much
easier for them to save because the dollar went a lot farther back then. While
that is true, it is also true there were also a lot fewer dollars.
You all may know some elderly relative or friend that have
accumulated a lot of money even though you thought they were middle class all
their life, and are wondering how they did it.
Let’s use a Grandpa and Grandma as an example.
Grandpa may have never made more than $10,000 a year. Other than
in tough times in the depression, Grandma usually did not work. They both had
poor parents and received no money or inheritance from them. If Grandpa retired
in 1973 his last yearly income of $10,000 equals $54,835.05 in today’s
dollars. Very much a Middle class income then and now. So that is the most he
ever earned in one year recalculated to today’s dollars. If you want to test
other numbers try this site. Dollar
values adjusted for inflation
Grandma controlled the money. Some may say Grandma was cheap; I
would say she understood the difference between needs and wants and the
important concept of paying yourself first. They rarely ate out, only
owned one car. She saved some money out of every one of Grandpa’s paychecks and
she started saving from the very first paycheck. She did not understand stocks
and it was not as easy to buy stocks in those days, but fortunately Grandpa’s
employer had a stock purchase plan which they bought from regularly and the
stock was doing will. She invested the rest in T-Bills. So she started early,
saved regularly and invested wisely. This is how your Grandma became a
Millionaire and how you can become one also.
Here are some more articles on the concept of paying yourself
first.
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