When I was growing up as a kid in Washington, DC USA I lived in a middle class African-American neighborhood but went to school in an upper middle class mostly white.
The contrast is neighborhoods was HUGE.
My house was separated from my high school by a huge park called Rock Creek Park. It's the main divider between average families and some of the wealthiest people in the nation's capital.
My wealthy classmates talked about investing in stocks, real estate, starting businesses and other things that seemed impossible if you grew up in the type of neighborhood I did.
The people in my community talked about stuff like celebrity gossip, cars, clothes and how to stretch your money further.
I never judged anyone in my neighborhood because I understand life isn't fair. There are a lot of systems holding people back. It's not their fault. You cannot control everything.
The only thing you can control is yourself, your actions, and your habits.
It was during my senior year of HS that I started to really study the difference between the two neighborhoods.
All else aside, what were rich people doing differently than poor and middle class people? Why were rich people constantly buying assets while everyone else lived paycheck to paycheck?
I knew it had to do with savings money but I couldn't explain it in words. There had to be a simple strategy to follow. Something so simple that anyone could do it.
I picked up two books that changed my life: Rich Dad, Poor Dad and The Richest Man in Babylon.
Both these books mentioned the same universal strategy that separates rich from poor.
The rich pay themselves first.
What Does It Mean to Pay Yourself First?
Take a look at this diagram. Can you notice the difference? It shows 3 types of people based on what they do with their income after they receive it.
The rich buy assets. They pay themselves first before anyone else.
The middle class buys luxuries. They pay everyone else then save whats leftover.
The poor buy stuff. They pay everyone else and have nothing left afterwards.
So what's the definition and meaning of “Pay yourself first?”
In Rich Dad, Poor Dad, author Robert Kiyosaki explains the power of paying yourself first as a way to buy assets and live off of passive income.
In order to be rich, you must have the self-discipline to pay yourself first. By this, I simply mean using your income to invest in cash-flowing assets before you pay your bills or buy anything fun. This in turn will create more income that you can use to invest in more, cash-flowing assets. Do that and you’ll have more money than you know what to do with.Source: The Power of Paying Yourself First
In The Richest Man in Babylon, author Robert Classon list the “7 rules of Gold” and mentions pay yourself first as rule #1.
Start thy purse to fattening. This point is actually the crux of the book: the classic principle of paying yourself first. Clason recommends saving at least 10% of all income earned. Even in his example of those who are paying off debt, he still advocates setting aside this one-tenth. If you want to save money for your future, you must begin by consistently setting aside part of your earnings today.Source: Richest Man in Babylon 7 Most Important Lessons
It's as simple as setting aside a portion of your income in a separate investment account (or precious metals like gold) and adding to your balance every month. You can invest in stocks & index funds or simply hold lower risk investments such as bonds, gold, silver & artwork.
What Percentage of Your Income Should You Invest?
The Richest man in Babylon recommends 10% but you should do as much as you can afford.
Personally, I'm on the 70/30 budget where I save and invest 30% of my income. As my income increases in the future, I hope to reach a 10/90 budget where I invest 90% of my income.
The #1 rule of the rich is pay yourself first. This alone will transform you from broke to drowning in cash if you follow this simple advice.
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
While living overseas, he uses PureVPN for a low cost VPN service.
He recommends Bluehost for setting up your own personal and/or business blog.
While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.