The Most Important Rule of Money: Pay Yourself First

Let me begin by saying I am not a financial expert, nor do I have financial training. I am not a CPA, an investment banker, or a tax expert. I am just a normal American, still in school, with a job (sorta), who has read a lot of finance blogs, books, and articles. I apply this one rule to my life every day. And I am in a fairly stable position. I can manage my monthly expenses, and have a small amount set aside for retirement and savings. I'd like to share the most important rule of money I ever learned.

My main financial training came from my parents. My father set each of us kids up with a savings account at age 13. We were taught how to balance a checkbook, and how interest works for or against you. I was given a book that remains the cornerstone of my financial outlook on life. That book was "The Richest Man in Babylon" by George Clayson (free audio version on YouTube). It is a simple story of life in ancient Babylon, and how the richest man tried to teach the people how to also become rich.

The number one rule of how to begin growing wealthy, is this: Pay Yourself First. All other things will build upon that rule. But what does that mean? An article from About.com says: "Money, like water, expands to fill the container in which it is placed". This means that if you set a goal for your money, and take steps to get it to that "container", it will eventually expand to reach that amount. But if you don't have goals and a plan to reach those goals, you are likely to reach the end of the month with no more money than you began with. Many Americans are living paycheck to paycheck, 75% by some estimates! But it doesn't have to be that way.


The Road to Financial Freedom


It will not be easy. If it were, there would be no debt and everyone would be wealthy. It will require discipline. It will require sacrifices. But it is more than possible. If you are determined to get out of debt and/or become financially stable and eventually wealthy, start taking these steps right now.

Step 1: At the beginning of the month, before paying anything else, pay yourself. Try for 10% of your take-home paycheck. If you feel that is too high, begin with 5% and work your way up. But DO IT. Take that 10%, whether it be $10 or $1000, and put it into a savings or investment account. Even if you can't afford it. If after that, you pay your other bills and come up short, write down by how much.
Step 2: Find a way to make up the difference, increase your income and/or decrease your expenses. You may need to work a few extra hours, pick up a side job, sell some things, or give up a few perks. But ask yourself, are a few immediate gratification items worth lifelong financial bondage? Is it worth going out for dinner or drinks to always have debt hanging over your head? Pay yourself, then do what it takes to make up the difference this month. Then do the same next month.
Step 3: Reduce your 'extra' expenses. Anything you do not require to live is extra. Rent/mortgage, utilities, and basic food. Besides that, do what you can to cut back. Maybe take the bus or carpool instead of driving, eat in all week, stop going out for movies. Make it a game and see how low you can get your spending to go. This is where budgeting comes in. Create a budget of how much you want to/can afford to spend in certain categories each week/month, and follow it.
Step 4: Build up a solid emergency fund. For a typical single individual, you probably need about 3 month's expenses. If you have children, plan for an extra month per child as well. This would help cover things like doctor visits, sickness, car troubles, job loss. It will give you a huge comfort knowing you have some money saved and so small life problems won't totally derail your financial life. This emergency savings is the beginning seed of financial freedom.
Step 5: Once you've built up an emergency fund, invest. Keep that 1-3 month fund in something liquid like a savings account, then start using that 10% per month to invest. Open a 401K or money market account, and start investing in your future. Pay down debts, or buy stocks/mutual funds/bonds/real estate. Educate yourself on investing options, and play it safe until you learn the ropes. Don't believe 'get-rich-quick' schemes or you're likely to lose your carefully guarded nest egg. This money is the seed you hope to grow into a tree of wealth, a bad investment will rip it up by the roots and you will have to start all over. Continue to 'water' it with monthly investments, and over time you will see it grow.


Though this can be so very difficult at first, over time paying yourself first will become natural. You will start to feel a great sense of pride and accomplishment as you watch your balances grow and your debts disappear. You will start to enjoy living more frugally, because it means you have more left over to add to your savings and investment. Best of all, you will rest easier knowing that if an emergency arises, you can easily take care of it, and your future retirement will be more comfortable. Don't wait another day, set up that direct deposit and take the first step down the road to financial freedom today!

More articles on Paying Yourself First:
Pay Yourself First: What It Means and How to Do It from Wisebread
Pay Yourself First from Get Rich Slowly
What Does Pay Yourself First Mean from AboutBudgeting


Do you pay yourself? Any advice to get started?

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Budget Epicurean: The Most Important Rule of Money: Pay Yourself First

Tuesday, April 29, 2014

The Most Important Rule of Money: Pay Yourself First

Let me begin by saying I am not a financial expert, nor do I have financial training. I am not a CPA, an investment banker, or a tax expert. I am just a normal American, still in school, with a job (sorta), who has read a lot of finance blogs, books, and articles. I apply this one rule to my life every day. And I am in a fairly stable position. I can manage my monthly expenses, and have a small amount set aside for retirement and savings. I'd like to share the most important rule of money I ever learned.

My main financial training came from my parents. My father set each of us kids up with a savings account at age 13. We were taught how to balance a checkbook, and how interest works for or against you. I was given a book that remains the cornerstone of my financial outlook on life. That book was "The Richest Man in Babylon" by George Clayson (free audio version on YouTube). It is a simple story of life in ancient Babylon, and how the richest man tried to teach the people how to also become rich.

The number one rule of how to begin growing wealthy, is this: Pay Yourself First. All other things will build upon that rule. But what does that mean? An article from About.com says: "Money, like water, expands to fill the container in which it is placed". This means that if you set a goal for your money, and take steps to get it to that "container", it will eventually expand to reach that amount. But if you don't have goals and a plan to reach those goals, you are likely to reach the end of the month with no more money than you began with. Many Americans are living paycheck to paycheck, 75% by some estimates! But it doesn't have to be that way.


The Road to Financial Freedom


It will not be easy. If it were, there would be no debt and everyone would be wealthy. It will require discipline. It will require sacrifices. But it is more than possible. If you are determined to get out of debt and/or become financially stable and eventually wealthy, start taking these steps right now.

Step 1: At the beginning of the month, before paying anything else, pay yourself. Try for 10% of your take-home paycheck. If you feel that is too high, begin with 5% and work your way up. But DO IT. Take that 10%, whether it be $10 or $1000, and put it into a savings or investment account. Even if you can't afford it. If after that, you pay your other bills and come up short, write down by how much.
Step 2: Find a way to make up the difference, increase your income and/or decrease your expenses. You may need to work a few extra hours, pick up a side job, sell some things, or give up a few perks. But ask yourself, are a few immediate gratification items worth lifelong financial bondage? Is it worth going out for dinner or drinks to always have debt hanging over your head? Pay yourself, then do what it takes to make up the difference this month. Then do the same next month.
Step 3: Reduce your 'extra' expenses. Anything you do not require to live is extra. Rent/mortgage, utilities, and basic food. Besides that, do what you can to cut back. Maybe take the bus or carpool instead of driving, eat in all week, stop going out for movies. Make it a game and see how low you can get your spending to go. This is where budgeting comes in. Create a budget of how much you want to/can afford to spend in certain categories each week/month, and follow it.
Step 4: Build up a solid emergency fund. For a typical single individual, you probably need about 3 month's expenses. If you have children, plan for an extra month per child as well. This would help cover things like doctor visits, sickness, car troubles, job loss. It will give you a huge comfort knowing you have some money saved and so small life problems won't totally derail your financial life. This emergency savings is the beginning seed of financial freedom.
Step 5: Once you've built up an emergency fund, invest. Keep that 1-3 month fund in something liquid like a savings account, then start using that 10% per month to invest. Open a 401K or money market account, and start investing in your future. Pay down debts, or buy stocks/mutual funds/bonds/real estate. Educate yourself on investing options, and play it safe until you learn the ropes. Don't believe 'get-rich-quick' schemes or you're likely to lose your carefully guarded nest egg. This money is the seed you hope to grow into a tree of wealth, a bad investment will rip it up by the roots and you will have to start all over. Continue to 'water' it with monthly investments, and over time you will see it grow.


Though this can be so very difficult at first, over time paying yourself first will become natural. You will start to feel a great sense of pride and accomplishment as you watch your balances grow and your debts disappear. You will start to enjoy living more frugally, because it means you have more left over to add to your savings and investment. Best of all, you will rest easier knowing that if an emergency arises, you can easily take care of it, and your future retirement will be more comfortable. Don't wait another day, set up that direct deposit and take the first step down the road to financial freedom today!

More articles on Paying Yourself First:
Pay Yourself First: What It Means and How to Do It from Wisebread
Pay Yourself First from Get Rich Slowly
What Does Pay Yourself First Mean from AboutBudgeting


Do you pay yourself? Any advice to get started?

Labels: , , , , , , , , , ,

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