Pay Yourself First

June 28th, 2009

This one thing will set you apart from your current finances and it can do so in a very short time.  The whole idea is you pay everyone else, but are you paying yourself?  If not, why not?  You start to think about and handle your money differently when you make a commitment to pay yourself first.

There are several reasons to pay yourself first:  The first is so you can start to manage your money better.  Think about this, “The only difference between a rich man and a poor man is the rich man didn’t spend all his money.”  In the book by George S. Clason “The Richest Man in Babylon” the first thing that lead to his enormous wealth was that he began to pay himself first then he paid all his creditors with a certain percentage and he lived on the rest.  By the time he had paid his creditors back, he had established a very powerful practice in his life of managing the money that came into his life.  This gave him far more and better options for how to use this money in his financial life which is the second reason:  more confidence in your financial success.  Yet another reason is this will make Americas economy stronger when people are not debt ridden and able to make better financial decisions.

In the book “Money Mastery – 10 Principles That Will Change Your Financial Life Forever” they discuss the fact that hardly anyone is in control of their finances and most are living paycheck to paycheck.  They have found that everyone can find 1% of their annual income per month that is being wasted on unnecessary spending if they start tracking what they spend money on.  This means that if you earn $35,000 annually you will find $350 per month that you are wasting.  Start tracking your money and looking for money you are wasting which you can save.  As your savings grow so will your confidence.  You will begin to make better purchasing decisions, you will begin to pay down your debt, and you will begin to make sure you are not adding more debt to your financial situation.  When you have eliminated your debt you can increase the amount you pay yourself first and you will begin to “see” opportunities to make more money. 

In his book “The Five Secrets a Millionaire Taught Me”, Richard Paul Evans calls these opportunities “Winning In The Margins.”  Most people save a little and start a small business in stocks, mutual funds, futures, options, real estate, and the list goes on, but they have not learned to pay themselves first, and they have not learned how to really manage money.  Since they haven’t learned these skills most of their endeavors turn into “losing in the margins.”  Ask yourself this question:  Have you done any of these things and lost money or not had the success you thought was possible? 

The richest man in Babylon failed miserably at his first business endeavor and he attributed it to not getting expert help.  He and his partner (who was not an expert in precious stones and gems) bought fake diamonds because neither had the knowledge to succeed in that particular field.  He learned to consult experts when he needed professional help.  Usually when you consult an expert it will cost you money but it will be well worth it because they will help you avoid the mistakes that novices make.  You must be very diligent when you select professionals to help you so you don’t get ripped off by a “so-called” expert.  They must be able to demonstrate their ability to give you help you need not just line their own pockets.

The authors in the above mentioned books also talk of the benefits of saving money is to save a certain amount like 6 months of living expenses so you will not be in dread should the unthinkable happen and you loose your job.  Once you have done this the next goal may be to save one years living expenses.  See how that can help your sense of security and allow you to comfortably make financial decisions when you are not stressed about how next months rent is going to get paid.  By the time you get to the point of saving for investment purposes you will be in great shape financially and so the decisions you need to make about your business and investments will not be strained by personal financial problems.  You will be at ease and able to think more clearly about your objectives and truly in a position to find situations where you will be “Winning In The Margins.”

Start today.  This really is the first step in your financial success.  No one is going to force you to pay yourself first, no one is going to show you exactly how you will benefit from this principle.  You will have to do it yourself and you will have to measure the reward yourself.  Start with what you can, track your money find and extra $20 or $200 per month and pay it to yourself, put it in a saving account and watch it grow.  If you cannot save 10% of your monthly earnings start with a lower percentage and have the objective to increase it when you can.  Just start somewhere and make the commitment that you will no touch that money until you reach your next step. 

You wouldn’t pay your telephone bill this month then when you find yourself short on cash next month call up the telephone company and get the money you paid them last month back would you?  Well once you have paid yourself its gone just like paying any other bill.  Don’t Touch That Money unless you have a plan that will put that money to work for you.

Next time we will talk about ways to save money.  These ways are in addition to paying yourself first.  Talk to you then.

Suggested Reading:

The Richest Man in Babylon by George S. Clason

Money Mastery – 10 Principles That Will Change Your Financial Life Forever

Five Lessons a Millionaire Taught Me About Life and Wealth by Richard Paul Evans