Pay Yourself First

A Few Ways to Get Rich
There are more ways to get rich than I could list. You could be born rich or marry rich, you could be really good at something like sales or playing basketball, or you could invent a product or service that becomes popular, etc. The problem is that most of these methods require a certain combination of talent, intelligence, desire and luck.

Hopefully you have that combination, but if you happen to be untalented, slow, not-motivated, and unlucky you can still get rich. You can get rich by the time tested method of saving your money. This should be common knowledge, but what is less understood is how to develop a good system for saving money. Pay yourself first is THE system.

Death and Taxes
They say that two things are certain in life, death and taxes. This is true because the government has a bulletproof plan for getting paid. They take their cut first. They don't rely on your willpower or budgeting strength. Pay yourself first works the same way. You take out your savings before you can spend it on other things.

Numero Uno
You (and your family) are of number one importance. So you are the most important person to pay. Before you pay your mortgage, rent, cable, utilities, credit cards, gas, food, or anything else you should pay yourself.

Wait A Second
At this point you may be thinking this sounds crazy. You're afraid that if you don't pay your bills you'll get into trouble. You probably feel like there is never enough money to go around, and can't imagine starting a savings plan.

Don't give in to that fear. If you pay yourself first you will adjust. You will be forced to find ways to either spend less money or earn more in order to maintain your lifestyle.

The Hard Way
So many people try to do it the hard way. They struggle to be frugal, and they think there will be money left over to save. It doesn't work. Statistically most Americans are drowning in debt and don't save. In 2008 the average American had $117,952 in debt and only saved $392. Hopefully that grim statistic will convince you that for most people willpower does not work. A better method is to pay yourself first.

How Much Should I Save?
This question is important. Most personal finance experts suggest that you save between 10 - 15% of your gross income. A rule of thumb I've heard is save 10% if you want to retire, 15% if you want to retire well, and 20% if you want to retire wealthy. Obviously 4% is not going to cut it, but that's not personalized advice. This is a blog. I strongly suggest that you sit down with a licensed financial advisor to create a plan that meets your needs.

Want A Tip? Give Yourself A Raise
Every time you get a raise add half of it to your savings. For example, if you get a 5% raise increase your savings by 2.5%. If you're already saving 10% of your gross income you jump up to 12.5%. You will never miss that money because you never had it.

Hello 401(k)
If your company offers a 401(k) plan than you should use it. The money you contribute is pre-tax. Which is like investing a full $1 rather than just 70¢. Some companies will even match a portion of what you invest; that's free money. Plus the interest you earn in your account is tax differed. The best part is that the money gets taken out of your pay before you ever see it.

Goodbye 401(k)
The 401(k) is nice, but the harsh reality is companies are dropping benefits. It is very likely you will not have the option of a 401(k) during a portion of your career, but you should continue to pay yourself first. So here is another option.

My Automatic Savings Plan
This is the plan that I developed when I was working for a company that did not offer a 401(k). I opened up a brokerage account, an IRA account, and a high-interest savings account at a well-known online brokerage. I then had the payroll department at my company split my direct deposit between my regular checking account and my brokerage account. I had them send 15% of my paycheck to my brokerage account and rest went to my checking account.

From my brokerage account I could transfer the money into my IRA. Once I reached my IRA's maximum contribution for the year, I could invest the rest in mutual funds or stocks or put a portion into my high-interest savings account. What's important is that I paid myself first before I had access to the money.

Caution: Don't Use Your Regular Savings Account
This is another thing a lot of people do wrong. Ever since banks introduced ATM cards and instant transfers between accounts, traditional savings accounts stopped being a good vehicle for long-term savings. They are really more like a second checking account. It's much better to use dedicated retirement or brokerage account where you have limited access to your savings, and where you can invest in things like mutual funds and securities.

Conclusion
Why not pay yourself first and pay yourself well? Once your system is in place it requires very little effort. It's a simple solution that actually works. If you want to know the secret to building wealth over time it's this, pay yourself first.