One of the most important lessons I learned was – Pay Yourself First.
WTF! I even asked myself… what does Pay Yourself First mean… how can you pay yourself first… you’re an employee, someone else pays you… what kind of selfish statement is this!
Well, it took me a while to learn this. And here’s what it really means. It means before you pay anyone else from your income, before your creditors, before the government, before suppliers, before paying any kind of expense – you pay yourself i.e. first and foremost decide how much you are going to keep aside aka save and put that in a separate account of yours. Only after you’ve done that… should you pay others… save first, spend later – not the other way around as per conventional wisdom.
Now, let me get this straight. There are two ways to become wealthy, ok perhaps three. The first is to reduce your expense, the second is to increase your income. Now the problem with the first there is only so much you can reduce. You can cut to the bone, but if you are not earning more income – you will still remain poor.
If you really want to get wealthy, you’ll need to get rid of the debt you have. Debt makes you a slave of money, when money should actually be your slave. So let’s turn the tables around. Now let’s say you have a large amount of debt, the beauty of it – is you will continue to pay interest on it until you pay off your debt. Let’s call it interest ‘burden’. Now your life will not become comfortable until you pay of this debt. But you can’t because you’re not earning enough to cover your expenses… so the interest burden just keeps adding on. Sound familiar. And if you don’t pay… the voice of your creditors get louder and louder… they’ll literally be shouting at you. I hope that will be enough stimulation to get you moving! (Yes, I know there’s good and bad debt – but stay with me on this).
Its a vicious cycle. You can’t get out of debt, because the interest burden keeps piling up, all because you’re unable to make your payments. Ouch.
So you have to take drastic measures. And you may not be able to do it in one go… you still need to live, you need food, clothing and shelter, you need to take care of your family, you essentially need to survive to work,to earn money that will ultimately pay that debt off (Bailouts are only for rich corporates, not individuals!). So negotiate with your creditors (credit card company, mortgager, banker or even landlord) to reduce your rates, give some grace period. Then once you have done this, make a list of the bare essentials you need.
Let’s say it’s one third of your income, put that money into a safe place (savings account is better than a mattress) – as that money grows you will be building up your wealth and gaining interest on that – that’s paying yourself! Do this every time, and you’ll make a habit out of being rich! Not only are you creating a cash treasure, you’re also building an emergency fund. In short, you’re are buying back your freedom – all with the power of compounding.
Then with the next one third, pay off your creditors. And with the final one third – you will force yourself to live within your means. If you can’t live within that amount… it means you need to increase your earnings/income through additional work or new sources of income. In short,you gotta work smarter and harder for money. But don’t worry, with this approach of paying yourself first – you’re actually building up wealth for a better life.
Here’s a normal persons cash flow:
Income => PAY Taxes => PAY Expenses => SAVE Remaining.
Now if you follow that, there’s a good chance if your expenses are more than your income or your income is very modest – you’ll have very little left to save and invest – taking a longer time to become wealthy. Time to change your priority. By paying yourself, you’re changing your priorities. Saving and building wealth has become your priority. Change the equation around.
Income => SAVE Amount => PAY Taxes => PAY Expenses
By changing the priority, you’re forcing yourself to save first, spend later. Instead of paying all your bills and expenses first and then saving whatever is left over, do the opposite. You’ll find it amazing how you can reduce your expenses when put under pressure of limited cash. And sooner or later, you’ll find out that there’s a limit to reducing… so you’ll probably start selling useless stuff, you’ll do odd jobs, you’ll figure out a way to earn more income.
Income => SAVE Amount => PAY Expenses => PAY Taxes.
Even better (and you need to start a business for this). You actually get to charge some expenses to your business, and then based on that, pay your taxes… cool aint it!
Ok, Cool – so How Do I Do it?
I thought you’d ask this question. Basically you have to make it as hassle free and effortless – in short –as easy as possible. Automate or Obliterate! Setup a separate savings account (look for one which pays the best interest rate) and give your banker / company a standing instruction for direct deposit from your salary account / paycheck – the day your salary comes in – to this savings account. I don’t care if you save 10%, 20% or 50%… whatever your percentage – write it in stone and automatically schedule those weekly or monthly payments to your own savings account. Doing this you wont forget, you wont even have to think about it. Once again, fill it, shut it and forget it.
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