What Does It Mean To Pay Yourself First: Creating psychological mechanisms based on habits and goals to assure a stream of cash flow for you to increase your wealth is the key to sustained wealth building. In my series on wealth creation, The first in the series shows you a simple technique to become wealthy. Pay yourself first is a popular phrase in personal finance books and blogs, just like compounding.
Pay yourself first means saving money before spending it on amusement, gifts for parents, or other purposes. Many people ask me how to start investing and when to enter the market. It’s not only about being in the market but having the cash to seize possibilities. It doesn’t matter whether a bear is coming your way if you have monthly cash flow. If you are fully invested, a $15,000 annual cash inflow allows you to buy at bear market pricing. Without it, you’d have to sell assets at a loss to fund new prospects. If you can’t generate meaningful cash flow into your investment savings account, I don’t think you should invest.
Paying yourself first is one of the most basic fundamentals. Regular savings contributions help establish a long-term nest egg. While the idea is sound, implementing it is tough. Today we will examine why this is and how to overcome it. Our culture rewards spending over saving. Advertising on TV, the internet, and newspapers is a daily occurrence in our society. Increasing affluence and peer pressure also breed more arrogant people who compete for more extravagant wants.
This Establishes a Societal Norm:
- Must take one vacation per year
- You must get this device because you need it.
- an automobile after x years of work since it is convenient
- You must have a lavish wedding.
It is tough to modify because we are educated by our parents and key schooling influences from a young age. Some wealthy parents instill sound financial habits in their children from an early age. Others don’t put any attention to it, and they grow up to be wasteful adults who squander Poor kids see their parents take out pricey installment loans for new goods and vacations. This can be learned early on if the educational system emphasizes it. It doesn’t Habit Compounds Bad Habits, too. Everything compounds. Mentally, changing habits is difficult.
A poor habit like smoking in the secondary school restroom at 14 years old, not cleaning your teeth properly, or not standing straight will be difficult to break later in life. It’s easier to save $300 per month if you start saving $2 per week in high school, then increase to $4 in poly and junior college. Blair Livingston has a wonderful article on compounding. Read the article if you doubt habits and compounding. Why do endowments work? Because our insurance agent hounds us! How many of us would actually do it if it required so much paperwork?
What Does It Mean To Pay Yourself First
Anxieties to Loss: Another reason is that while setting away $X is simple, many people interpret it differently. They thought you were taking money they couldn’t spend. Savings are viewed as a loss by most people! It’s a lot more enjoyable now. (How to overcome) Keeping this in mind, we realize that many of the issues are not financial. It concerns us:
You may have missed out on the opportunity to grow the Do Not Touch Fund because of its unfavorable label. Savings + Investing – a nice yet long name. Maybe doesn’t highlight the end goal. Wealth Chest – I used to call mine that. We are all building wealth, whether we take less or more risk, and a chest is an old-fashioned way to store capital.
- societal issue
- Issues Recur
- Fear of Loss
- Complexity phobia
- The answers are to design around these problems.
- The steps to building money by paying yourself first are shown above.
- Money for Wealth Building and Other Purposes Separated Consciously
- Like naming your pet, giving yourself a pleasant, feel-good moniker can help you achieve your goal.
- In this situation, my pals nicknamed them
- Investment Warchest – apt moniker for a builder.
Your Wealth Building fund will always come first:
- This is not for vacations.
- This is not an emergency tap.
- This is not for your hobbies.
- You don’t lend it to friends or family.
- These are solely for your benefit.
Arrange for money transfers from #1 into a bank account.
Savings habits are hard to break, so enforce them. That’s why insurance agents are hawking endowment plans. Although expensive, many people believe they have no other option. I was shown a 20-year endowment growing in one year. Annualized return? Almost 1.4% This costs you $2,400 in commissions.
Invest the money from your Wealth Building Account at higher rates
To build a nest egg so you don’t have to work as hard in the future, or so you can retire comfortably. Choose a wealth development method that fits your time, competence/edge, risk tolerance, and time horizon. Many people believe that paying oneself first involves using extra money. Paying yourself first is not something I recommend. You don’t value wealth creation over other values.
Do you pay yourself first?
I know many will use a Prudential account. The Philips Sharebuilder plan involves monthly investments in blue-chip stocks like Singtel or STI ETF.
What else did I miss?
Start by bookmarking my Dividend Stock Tracker, which gives the current yields of blue-chip dividend stocks, utilities, and REITs. Use the free Stock Portfolio Tracker to track your dividend stock returns by the transaction. Investment fund – I intend to invest, thus I am first gathering funds and learning. Emergency money – Fund for me or family members in case of illness, car trouble, etc. Personal saving – it signifies Unspecified fund – This money is for travel or wedding gifts. A lot of individuals take paying themselves first means putting money from bonus into this.
On the other end of the scale, there are those that live like a hermit and just channel and channel more funding towards wealth growth. It’s excellent that you value wealth-building that much but there are other goals in life as well. If you push your wealth growth to the utmost extent, chances are you left yourself weak in other areas such as health, family, and well-being. You don’t want your wealth-building ambitions to be delayed by an unplanned change in employment status or unanticipated spending needs, hence it is best to preserve a moderate amount.
How differently do you pay yourself first?
I know many will utilize a Pru-cash or Pru-save account. Some others use the Philips Sharebuilder plan and monthly add XXX amount into blue-chip shares like Singtel or STI ETF. You may be more comfortable paying yourself the first 1 month of your 2 months bonus simply to be on the safe side. You may be more comfortable funding $400 per month instead of $700 per month and neglecting your kid’s schooling.
What more items did I miss out on?
To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the current yields of blue-chip dividend stocks, utilities, REITs updated nightly. Make use of the free Stock Portfolio Tracker to track your dividend stock by transactions to show your total returns. Go to Resources for my finest articles on investment and money growth.
