Pay Yourself First

This is a bit of advice that many coaches and advisors provide.  But do you know what they mean?

This is related to the Secrets of the Wealthy post.

Problem 1 – You can’t save yourself rich

It’s a well known “secret” that you can’t save yourself rich.  If you take any excess money at the end of the month, and stick it into a “savings” account at the bank, the interest rate (if any) will almost always be less than the real rate of inflation.  So over time, your purchasing power decreases.

Problem 2 – No spare money!

Another issue with “saving” is that 85% of households spend 110% of their income.  Therefore there isn’t any extra money at the end of the month.

The solution?

This is not the entire solution, this is step 1.

Pay Yourself First!

What this means, is before you spend ANY of that income that came in, pay yourself off of the top.   Ways to do this:

• Have your employer deposit a portion of your income into a different bank account.  Out of sight, out of mind!
• If your employer refuses (or if you are self employed), the first action you take on pay day is to move the amount you are “paying yourself” into that other bank account.

And once the other bank account accumulates enough “savings”, purchase an asset (something that generates passive income). (Step 4 of the Secrets of the Wealthy)

How much to pay yourself?

If you are following the Secrets of the Wealthy posts, you will see that the recommendation from GC was to live on 20% of your income.  With that number, he is saying you should be paying yourself (i.e. saving) 40% of your income.  I will expand further on that in the related post.  I hear what you are thinking – there is no way to live on 20% of your income.  I address this in the related post!