Pay Yourself First Definition
What's the meaning behind the infamous saying “Pay yourself first”?
To sum it up in a sentence: Pay yourself first is the habit of diverting a portion of your income to a separate savings (or investment) account before paying bills and other expenses.
Both these books mentioned the same universal strategy that separates rich from poor.
The rich pay themselves 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.
Why Paying Your First is So Important
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.
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 key to financial success is to pay yourself first. This alone will transform you from broke to drowning in cash if you follow this simple advice.
Pay Yourself First FAQ
What's the best amount to pay your first with?
$100 is a good starting point. If you earn $1,000 every two weeks from your paycheck then transfer $100 to a separate savings or investment amount before you pay your bills. If you're a freelancer/business owner like me then you can use a percentage strategy to figure out how much. My income is random so I may transfer as little as $10 or $500+ depending on how much money I receive.
How much should business owners pay themselves first?
As a self-employed small business owner, I know how it feels to juggle business expenses along with your personal needs. I typical save around 10 to 20% of my business income for myself then use the rest to cover my business and personal expenses. While it's important to reinvest in your business, you should also put some money aside in a SEP IRA to prepare for your retirement. I hold several dividend stocks in my SEP IRA as a way to generate passive income once I decide to change careers.
What's the best way to set up a system for paying yourself first?
Automated transfers. Setup a bi-weekly or monthly automated transfer from your checking account into your investment account. The money will be sent automatically so you can't spend it. Learn to live off the remaining money. After a while, you will get used to living off 80% or less of your income by spending less and living more frugally.