How to Pay Yourself First

Here's a great comment left on my post titled How to Find Money to Invest. The reader shares some good (and simple) steps we all can take to automate our savings/investment plans. His thoughts:

Good list! I think the easiest way to accomplish this is simply by doing number 1 and pay yourself first. I know it has almost become a cliche, but it really is true. This is exactly how I am able to scrape together money for investing also.

If you have direct deposit of your paycheck, then there is no excuse for not paying yourself first. All you need to do is set up a separate account at your bank, checking or savings, whatever is free and doesn't have weird minimum or withdrawal limitations. Then change your direct deposit to put a little money into this account as well. Maybe it is $10 per pay, maybe it is $20, or even $100. Whatever you decide to do, make sure that the account isn't linked to your debit/atm card so it is hard to get access to.

Next, just link up your brokerage account to this bank account and you are all set. As you build up the account you can easily make investment purchases from that separate account. You can even go one step further as most mutual funds allow for systematic purchases as low as $25. So you can then setup a systematic buy that coincides with your deposits and then everything is automatic. Not only are you paying yourself first, but you've created an automatic process towards building wealth.

This is what I do, though my process is slightly different. My steps:

1. My entire paycheck is placed into my checking account (after money has been deducted for my 401k, of course.)

2. I have a set amount that gets transferred to Vanguard automatically each month.

3. The Vanguard money is then automatically invested in a handful of funds according to my investment objectives.

It's simple, easy, and once it's set up, it's all on auto-pilot. I'm saving/investing without even doing anything!

Comments

[Dr. Artfredo C. Abella Ph.D, - C.O.A., PHILIPPINES.]

Paying yourself first is one of the magical touch for a person to become affluent in life. Time and again financial success points that one of the measures to become rich is simply to pay ourselves first. How? There are so many techniques in achieving this system, one is to let your employer deduct say ten percent of your monthly salary towards your trust account. If this is not existing in your company, the 401K approach is advocated in the western world were this kind of practice is common and done. If however, you are an individual entrepreneur make it a habit to deduct in your gross income every time you earn at least 10 to 15% and deposit it in your current or savings account without touching or withdrawing it. Pay yourself first has been advocated by great and successful financial experts since this approach will provide a person some avenues for investments once the amount becomes material. This practice is like tithing to your own self first so that this will serve as seed monies that you can plant and invest in the future and soon it will bear fruits and interest income which will be your stepping stone towards abundance in life. This concept has been reiterated for the nth times like The Richest Man in Babylon where it advocates that part of what you earn is yours to keep. The concept like if you cannot save then the seeds of greatness is not in you. These concepts and philosophy has been mentioned and echoed and re-echoed for the thousand times since this is the only way towards the road to affluence. Simply put, you are not wealthy since you have the money but you are wealthy that is why you have the money. Wealth is a state of mind and one measure in attaining it is to pay ourselves first. Unless a person will develop the philosophy of frugality and impose a discipline of saving and paying his own self first then he will have a debilitating road towards financial success. Paying your own self first is simply having and cultivating a habit of saving for the future or simply being a savekaholic - this means being a habitual saver of money every time you earn. It is not what you earn that counts but how much you save that matters all. The formula of 70-10-10-10 is indeed applicable in this countenance. Seventy percent of your income goes to your basic necessities in life - food, shelter, education and taxes; ten percent goes to tithing - these amounts goes to your favorite charitable institutions; ten percent goes to contingencies - these amounts goes if suddenly you blow your tire, for sickness and other emergencies and the other ten percent goes to paying yourself first - this means this amount is reserve so that your savings will increase over the period of times. In this present times we almost pay everything, you pay your bills, transportations, clothings, education, shelter, vacations, leisures and snacks. Alas, you have paid everything and what's left - nada, zero and worst of all just to satisfy your wants you use your plastic cards which will further drown you into the perdition of debts and money now becomes your master instead of you lording over it. The only way therefore, is to pay your own self first, no mater what your financial conditions you are in. In the end I like one author who once said that the definition of
a rich person is a poor guy with plenty of money.

[Bill]

Terrific comments made by Dr. Art Abella!!!!!!!!!!!!!!! I believe one day I will also grow rich by paying my self first. Great postings with great comments!!!!!!!!!!