The first post in my blog is about THE personal finance book that I would recommend to everyone. The basic lesson of that book is:
Pay yourself first; A part of all you earn is yours to keep.
What does that mean?
How do I “pay myself”?
Isn’t all I earn “mine to keep”?
It’s simple. But it’s not obvious. It wasn’t obvious to me until my Uncle told me to be sure to “pay myself first” when I was a fresh-out-of-college graduate starting my first “real” job. (Now that I’ve read “The Richest Man in Babylon” (read and re-read, because it’s good to go back to the well of inspiration), I wonder if my Uncle read it when he was young or if perhaps heard the advice to “pay yourself first” from one of his elders.)
The trick is to think of saving and investing as just as much of an obligation as paying for all the other things you regularly purchase. Each month you pay for a place to live, you pay for food to eat, you pay for water, electricity, and heating or cooling. You pay for transportation, clothes, and dozens of other things. The taxes you pay are your share of the cost of public schools, parks, roads, police, courts, and prisons. (Remember, as many have said, Taxes are what we pay for civilized society.)
Those things are necessary. But you should also consider your future well-being. Your future security. Your future comfort. Your future peace of mind. Aren’t those things also necessary? Set money aside for yourself, or we could say, for your future self. It’s up to you to make your future self as comfortable and secure as possible, don’t you think? So, pay yourself. Just as you pay the landlord or mortgage lender for a place to live, just as you pay the grocer, just as you pay everyone else, you also need to pay for the good things your future self should have. In a manner of speaking, just as you pay everyone else, you also pay yourself by taking some amount, say, 10%, setting it aside, and investing it reasonably. Every time you get paid, right along with every other bill you pay, take some percentage of your earnings and set it aside for your future self.
But why you pay yourself first?
It’s important to set this money aside first, before you spend money on anything else.
If you wait until the end of the month and then set aside whatever is left after you’ve paid for all your living expenses and whatever else you need and want, then you will find there’s nothing left. Needs and wants inevitably grow to the point where they will consume all you earn — every dollar, every dime, and every penny. Let that happen month after month, year after year, and you will have set nothing aside, made no investments, accumulated no wealth. As long as you have money in the form of cash in your hand or some number of dollars in your checking account, you will be tempted to spend it. If you consistently spend everything you earn, you will get used to it, and you will think it’s impossible to set aside 10% or more. Just as water flows out of a tank with an open faucet, your money will flow away from you as quickly as you earn it.
However, if you set aside money before you have a chance to spend it, you will find that you will automatically adjust your spending such that you won’t even miss the money you’ve set aside. Once that 10% is safely tucked away in an investment account, it’s not as much of a temptation. Out of sight, out of mind. You can continue to spend what’s left in your checking account. You’ll get along just as well saving 10% and spending 90% as you did when you were saving 0% and spending 100%. You adjust. You acclimate. You get used to a new way of doing things. That’s the magic of paying yourself first.
“Do not save what is left after spending, but spend what is left after saving.”
— Warren Buffet.
Don’t think that by paying yourself first you are depriving yourself of anything. Don’t think of the money you have saved and invested as something you no longer have. Rather, think of it as a payment, or better yet, a “gift” — a gift that you’re giving to yourself.
Remember the other part of the lesson: a part of all you earn is yours to keep. If you don’t set aside part of your earnings, if you just spend, spend and spend until it’s all gone, then you’re not keeping any of what you’ve earned. It’s all going to the landlord, the banker, the grocer, the butcher, the baker, … maybe even the candlestick maker. As The Richest man in Babylon asks, Should everyone else have a claim to your earnings while you have no claim to even some part of it?
Keep some of your earnings for yourself. For your future self. A part of all you earn is yours to keep, so Pay Yourself First.