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?

How to: Set up an online bank account

Most people by now are in the online banking game. Technology has enabled deposits, transfers, and account balance checks at our fingertips for a long time. However, for those who have never done so, setting up an online bank account can be quite intimidating. It is scary to think that with a few clicks and some personal info that you can send money zooming about the inter-webs. But it is true. Setting up online banking is quick and relatively painless, and can be such a financial lifesaver. Especially when combined with mobile banking, you will never have to worry about a bounced check, declined card, mystery charge, late fees, or too-late-to-deposit check again. Well, maybe you can worry about those things, but you will have less of an excuse.

How to choose a bank

Your first step will be to choose a bank to work with. This depends on many factors, including what you will be using the account for, what banks are near you or if you don’t care about brick-and-mortar locations, if you will need a checkbook or card attached to the account, how much of a balance you intend to carry, etc. If all you want is somewhere to put a smallish chunk of change where you can’t spend it and watch it grow, an online provider is a safe bet. They don’t have physical locations, saving them money and allowing them to offer a slightly higher than average rate of return. CapitalOne360 (which acquired ING) is a great way to go, and they are always offering deals and promos. You can choose to have a checkbook or credit/debit card linked to the account as well. Ally is another top “branch-free” bank offering savings, checkings, loans and CDs. While no bank is perfect or 100% guarateed ‘safe’, both these providers are FDIC insured.

Online banking requirements

To sign up with an online only bank will require:

--You choose which type of account you wish to open (savings, checking, IRA, CD, money market, etc. Read the details on the bank’s website for % APR, etc or call the help number on the website to be sure you understand all terms and conditions.)

--Your social security number (and any others if you will not be only person on the account)

--A current mailing address, NOT a PO box

--A valid e-mail address

--Various personal verification data such as date of birth, mother’s maiden name, etc.

--Usually requires an opening deposit (bank rules vary as to whether or not there is a minimum) which can be linked from another account or a check you deposit

Of course, if you already belong to a traditional bank, setting up online banking is a great next step. Not only will you save trees and stamps by switching to electronic statements, you may also get some sort of reward from the bank for doing it, like a lower credit interest rate or no checking account fees. Check with your local branch to see if they have any promotions for going sans paper. Most banks you can simply go to their website and somewhere will be a button to set up online banking for your current account(s). If you have problems stop in a branch or call their help line. It is the same basic process for online only banks, but you will need your account number to link current open accounts.

Should I get a rewards card?

Once you have online banking set up, you can view account balances, set up automatic transfers or payments, link a line of credit for overdraft protection, and so much more. It may seem overwhelming to consider all the various banks and rewards policies out there, but if you don’t already, you should consider getting a card with some sort of reward system. If you feel lost, just starting with something is better than nothing. You can switch cards or banks or reward systems at any time, but you can never get back the 20,000 miles or $500 bonus cash you would have earned with last year’s regular purchases.

What about mobile banking?

If you have a smartphone, you could definitely benefit from enrolling in mobile banking as well. Most larger banks already offer apps to take care of banking needs on the go. You can deposit checks with a click of the camera, check balances, make payments, and transfer money, all while rushing to catch the 5:15 bus, dropping off the kids, heading to happy hour or picking up a rotisserie chicken on the way home. And with no fees associated (yet) there is no reason to not have mobile banking.

Photo from MindFieldLive

So whether you just want a quiet place for a nest egg to grow, to stash your vacation fund until cruise tickets go on sale, to hide some ‘fun money’ from a spouse, or to have a free checkbook delivered to your door, online accounts are the way to go. Just be sure to pick a password you can remember! {Look for my upcoming post on internet safety and creating creative passwords!}

Do you bank online?

How to: Make a "door snake" or "draft stopper"

Want to know a great way to help your budget in the colder months? Winter-proofing your house or apartment. If you live somewhere that experiences temperatures below 60 degrees (which is much of the world) your skin and wallet will thank you for taking some simple steps. Winter-proofing is beneficial because it can help your heater work less hard (due to plugging up drafts and beefing up insulation), keep your living areas warmer, decrease your energy needs, and decrease your energy bills. All good things. Some tips will not apply to you depending on what type of structure you live in and how much space you have to heat. A quick Google search brings up Yahoo's list of 12 Ways to Winter-Proof Your Home, Women's Day's Guide to Winter-Proofing Your House,  and UK Money's How to Winter-Proof Your Home and Beat the Big Freeze. 

A common thing among all winter-proofing lists is insulation. Regardless of whether you have a 5-bedroom home in the suburbs or a one-bedroom apartment in the city, insulating your doors and windows will keep drafts at bay and heating bills manageable. One way to insulate windows is to use plastic window cling or bubble wrap. I mashed several layers of bubble wrap over the bedroom window and duct taped it in place. There is definitely a noticeable difference in how much cold gets through the window now! This guide is to show you another simple way to avoid under-door drafts: by making a door snake! It may seem intimidating, but my friend B and I made two gorgeous draft stoppers in under 20 minutes.

You will need:

1 sewing machine (or needle, thread, time, and patience)

Material approximately 1 yard by 1 foot (use thicker cloths to stand up to more wear)

Approximately 6-10 cups filler (rice, beans, sand, salt, kitty litter, etc)

Step 1: Lay your fabric pattern-side up, and flip it over onto itself so the 'inside' faces out. Pin along a straight line.

Step 2: Use a basic stitch to sew along the pins from end to end. You can measure the length of your doorway, leave an extra 2 inches per end. This doesn't have to be super exact.

Sew all the way along the length. This will create a tube with open ends on both sides.

Step 3: Sew up one end of the tube. Make sure the two sets of stitches overlap to fully close that end.

Step 4: Now flip the tube inside-out so that the stitches are on the inside and the pattern is on the outside.

This is one of B's 2 cats, she was very interested in what we were doing. Mostly the parts involving string.

Step 5: Measure against your door frame to make sure you fill the tube to the right length. Cut off the extra, leaving a few inches on the un-sewn end.

Step 6: Take the filler material, and hold open one end. Fill the tube up until the length of your door frame.

B proudly holding our first filled door snake. =) This is before cutting off the extra end material and sewing up the open end. Also of note, kitty litter is cheap but very dusty. Maybe try rice in yours.

Step 7: Fold the ends in by about 1/4 inch so that you have 4 layers of material. This puts the frayed, cut ends on the inside and creates a cleaner look & hemline.

Step 8: Sew along the double fold at the end. Make sure it is nice and tight, and goes all the way to both sides of material. You don't want filler bits leaking out on your floor.

Step 9: Make sure your door snake is the right size for your door frame, and admire your hard work.

There you have it. A simple solution to cold wintry drafts that saves you from needing to double-sock and saves you some cash. You can re-use these for years, depending on the type of material and your level of sewing prowess. I've even heard of people sewing extra washable covers for these so they can wash the cover when it gets dusty/muddy/gross.

What's your favorite money-saving craft idea?