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.
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%, right off the top, setting it aside, and investing it reasonably. Every time you get paid, before you pay your ordinary living expenses, before you pay anyone else for anything, take some percentage of your earnings and set them 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 decide instead to 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’re very likely to find there’s nothing left. Let that happen month after month, and you future self won’t be get anything. As long as you have money in the form of cash in your hand or a large sum in your checking account, there will always be temptation to spend it. If that’s what you’re used to, you might think it’s impossible to set aside 10% or more.
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. It’s almost guaranteed that 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.
Remember this rule:
“Do not save what is left after spending, but spend what is left after saving.”
— Warren Buffet.
Don’t think of this as depriving yourself of anything. Don’t think of that money you used to pay yourself 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. Should everyone else have a claim to your earnings while you have no claim to even some part of it? Keep some percentage of your earnings for yourself. For your future self. A part of all you earn is yours to keep, so Pay Yourself First.