Pay yourself first

Pay yourself first

Bottom line. If you want to be rich, all you hae to do it make a decision to do something that most people will not do. That is to pay yourself first.

Nothing will help you achieve wealth until you decide to Pay Yourself First. The foundation of wealth building is Pay Yourself First.

What most people do when they earn a dollar is pay everyone else first. They pay the landlord, the credit card company, the telephone company, the government, and on and on. The reason they think they need a budget is to help them figure out how much to pay everyone else so that at the end of the month - or the year, or their working life - they will have something “left over” to pay themselves. This is absolutely financially backwards. It does not work.

When you boil it down, there are basically six routes to wealth in this country.

1. Win it
2. Marry it
3. Inherit it
4. Sue for it
5. Budget for it
6. Pay yourself first

A realistic plan to geting rich starts with good answers to these questions:

1. Do you know how much you should Pay Yourself First? What percentage?
2. Do you know where to put the money you Pay Yourself First? Are you putting it in the right place?
3. Are you actually doing it?
4. Is your Pay Yourself First plan automatic? Or do you have to think about it or do something about it every month?

What Pay Yourself First means

When you earn a dollar, the first person you pay is you. When most people earn a dollar, the first person they pay is Uncle Sam. They earn a dollar, and before it even makes it onto their paycheck, they pay the government something like 27 cents in federal income withholding taxes (often more). Then, depending on the state that they live in, they may pay an average of 5 more cents in state income tax. On top of that, there are Social Security taxes, Medicare, and unemployment. In the end, they wind up paying the government first as much as 35 or 40 cents of their hard-earned dollar. Seems like everyone is getting paid but the person who earned the paycheck.

It wasn’t always like this

The government didn’t always grab a chunk of your paycheck before you even saw it. Up until 1943, people got their money when they earned it, and they weren’t asked to pay income taxes until the next spring. However, from the government’s point of view, there was a problem with this system. People just could not be counted on to budget well enough to have enough money in reserve to be able to pay their taxes the following spring when the bill came due.

The government is pretty smart. It setup a system to make sure it got paid first. Not only that, it automated the process so that there will not be any slip-ups. It figured out a fool-proof way to make sure it would always get its money. No ifs, ands, or buts. The government come up with a system that would always work with regular people - a system that is based on the way people really are, rather than the way they think they should be. It is actually kind of brilliant.

Don’t pay the government first

If there was a legal way to avoid it, why on earth would you allow the government to have first crack at your paycheck? Remember, Uncle Sam’s cut totals roughly 30 cents of every dollar you make. That leaves you with just 70 cents to spend on EVERYTHING ELSE, including retirement savings and investing. Talk about tough. That is income shrinkage if we’ve ever seen it.

The secret is the way your money flows

We have a right to LEGALLY avoid federal and state taxes on the money we earn. You can legally Pay Yourself First, instead of the government, simply by using what is called a pre-tax retirement account. There are many different types of these accounts

1. 401(k) plans
2. 403(b) plans
3. IRAs
4. SEP IRAs

How much should I pay myself first?

Who you work for is waiting for you at home

Who you work for is waiting for you at home

As much as our employers would like us to believe otherwise, the reason most of us go to work each morning is not the company mission statement or even serving the customer. It is ultimately about us. When it comes down to it, the reason most of us go to work is for the sake of ourselves and our families. We go to work to protect those we love. Everything else is secondary. We are our first priority.

So, are you helping yourself? Are you really working for yourself? Are you working for your own benefit and that of your family when you go to your job each morning?

How many hours did you work last week?

Fill in the blanks.

Last wee, I worked a total of __ hours. I earn $_ an hour (before taxes). Last week, I put aside $_ for my retirement. So, last week I worked __ hours for myself.

To figure out how many hours you worked for yourself last week, you first need to ask yourself how much money you saved last week. If your answer is zero, then you worked zero hours for yourself last week. However, if you did save something last week, then divide the amount of money you put aside for your retirement last week by your hourly income.

e.g. if your income before taxes (also called your “pre-tax” or “gross” income) averages $25/hour, and you put aside $50 last week, divide $50 by $25, which gives you two - meaning you worked two hours for yourself last week.

The answer you get can tell you a lot about the kind of future you can expect to have.

Consider a person who earns $50K/year. He/she earns roughly $1K/week. So, how much should he/she be saving each week?

A good savings benchmark to shoot for is between 10% and 15% of your gross income. To keep it simple, lets call it 12.5%. Now 12.5% of $1K is $125 - meaning that if you are earning a gross income of $1K/week, you should be saving $125/week. That comes to $25/day.

In other words, you should be saving the equivalent of one hour’s worth of income each day.

Unfortunately, most people don’t even come close to saving that much. According to US Department of Commerce, the average American saves well below 5% of what he/she earns. In other words, most of us work barely 22 minutes a day for ourselves. And one out of five workers don’t put in any time at all for themselves - meaning, they don’t save anything.

You could be working for your future

Why would you get out of bed, leave your family, spend most of your waking hours taking care of business for someone else, and NOT work at least one hour a day for yourself? The answer is you shouldn’t.

The problem with most financial planning and financial education is that it focuses on numbers and not on people’s lives. Instead of thinking about percentages of income, think about hours of your life. How many hours were you planning on working for yourself this year, instead of for your employer, the government, the credit card companies, the bank, and everyone else who wants a piece of what you earn? How many hours of this week do you think your future is worth? What about today? How many hours do you want to spend today working for your future?

An hour a day is really not so much to ask in returen for a bright future. If you are not saving that much of your income right now, you are working too much for others and not enough for yourself. You deserve better.

Starting today, I am working for me

The automatic millionaire promise

I, __, hereby promise myself that starting this week, I will work at least one hour a day for myself because I deserve it.

Therefore, I promise that I will start Paying Myself First _ % of my gross income no later than __ (insert date).

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The power of self-discipline. If you cannot get control of yourself, do not try to get rich. You might first want to join the Marine Corps or some religious order so you can get control of yourself. It makes no sense to invest, make money and blow it. It is the lack of self-discipline that causes most lottery winners to go broke soon after winning millions. It is the lack of self-discipline that causes people who get a raise to immediately go out and buy a new car or take a cruise.

It is difficult to say which of the ten steps is the most important. But of all the steps, this step is probably the most difficult to master if it is not already a part of your makeup. I would venture to say that it is the lack of personal self-discipline that is the No. 1 delineating factor between the rich, the poor and the middle class.

Simply put, people who have low self-esteem and low tolerance for financial pressure can never, and I mean never, be rich. As I have said, a lesson learned from my rich dad was that “the world will push you around.” The world pushes people around not because other people are bullies, but because the individual lacks internal control and discipline. People who lack internal fortitude often become victims of those who have self-discipline.

In the entrepreneur classes I teach, I constantly remind people to not focus on their product, service or widget, but to focus on developing management skills. The three most important management skills necessary to start your own business are:

1. Management of cash flow.
2. Management of people.
3. Management of personal time.

I would say, the skills to manage these three apply to anything, not just entrepreneurs. The three matter in the way you live your life as an individual, or as part of a family, a business, a charitable organization, a city or a nation.

Each of these skills is enhanced by the mastery of self discipline. I do not take the saying “pay yourself first” lightly.

The Richest Man in Babylon, by George Classen, is where the statement “pay yourself first” comes from. Millions of copies have been sold. But while millions of people freely repeat that powerful statement, few follow the advice. As I said, financial literacy allows one to read numbers, and numbers tell the story. By looking at a person’s income statement and balance sheet, I can readily see if people who spout the words “pay yourself first” actually practice what they preach.

The cash flow tells the story. Most people look at the numbers and miss the story. If you can truly begin to understand the power of cash flow, you will soon realize what is wrong with the picture on the next page, or why 90 percent of most people work hard all their lives and need government support like Social Security when they are no longer able to work.

Do you see it? The diagram above reflects the actions of an individual who chooses to pay himself first. Each month, they allocate money to their asset column before they pay their monthly expenses. Although millions of people have read Classen’s book and understand the words “pay yourself first,” in reality they pay themselves last.

Now I can hear the howls from those of you who sincerely believe in paying your bills first. And I can hear all the “responsible” people who pay their bills on time. I am not saying be irresponsible and not pay your bills. All I am saying is do what the book says, which is “pay yourself first.” And the diagram above is the correct accounting picture of that action. Not the one that follows.

My wife and I have had many bookkeepers and accountants and bankers who have had a major problem with this way of looking at “pay yourself first.” The reason is that these financial professionals actually do what the masses do, which is pay themselves last. They pay everyone else first.

There have been months in my life, when for whatever reason, cash flow was far less than my bills. I still paid myself first. My accountant and bookkeeper screamed in panic. “They’re going to come after you. The IRS is going to put you in jail.” “You’re going to ruin your credit rating.” “They’ll cut off the electricity.” I still paid myself first.

“Why?” you ask. Because that’s what the story The Richest Man In Babylon was all about. The power of self-discipline and the power of internal fortitude. “Guts,” in less elegant terms. As my rich dad taught me the first month I worked for him, most people allow the world to push them around. A bill collector calls and you “pay or else.” So you pay and not pay yourself. A sales clerk says, “Oh, just put it on your charge card.” Your real estate agent tells you to “go ahead-the government allows you a tax deduction on your home.” That is what the book is really about. Having the guts to go against the tide and get rich. You may not be weak, but when it comes to money, many people get wimpy.

I am not saying be irresponsible. The reason I don’t have high credit card debt, and doodad debt, is because I want to pay myself first. The reason I minimize my income is because I don’t want to pay it to the government. That is why, for those of you who have watched the video The Secrets of the Rich, my income comes from my asset column, through a Nevada corporation. If I work for money, the government takes it.

Although I pay my bills last, I am financially astute enough to not get into a tough financial situation. I don’t like consumer debt. I actually have liabilities that are higher than 99 percent of the population, but I don’t pay for them; other people pay for my liabilities. They’re called tenants. So rule No. 1 in paying yourself first is don’t get into debt in the first place. Although I pay my bills last, I set it up to have only small unimportant bills, that I will have to pay.

Secondly, when I occasionally come up short, I still pay myself first. I let the creditors and even the government scream. I like it when they get tough. Why? Because those guys do me a favor. They inspire me to go out and create more money. So I pay myself first, invest the money, and let the creditors yell. I generally pay them right away anyway. My wife and I have excellent credit. We just don’t cave into the pressure and spend our savings or liquidate stocks to pay for consumer debt. That is not too financially intelligent.

So the answer is:

1. Don’t get into large debt positions that you have to pay for. Keep your expenses low. Build up assets first. Then, buy the big house or nice car. Being stuck in the rat race is not intelligent.
2. When you come up short, let the pressure build and don’t dip into your savings or investments. Use the pressure to inspire your financial genius to come up with new ways of making more money and then pay your bills. You will have increased your ability to make more money as well as your financial intelligence. So many times I have gotten into financial hot water, and used my brain to create more income, while staunchly defending the assets in my asset column. My bookkeeper has screamed and dived for cover, but I was like a good trooper defending the fort, Fort Assets.

Poor people have poor habits. A common bad habit is innocently called “Dipping into savings.” The rich know that savings are only used to create more money, not to pay bills.

I know that sounds tough, but as I said, if you’re not tough inside, the world will always push you around anyway.

If you do not like financial pressure, then find a formula that works for you. A good one is to cut expenses, put your money in the bank, pay more than your fair share of income tax, buy safe mutual funds and take the vow of the average. But this violates the “pay yourself first” rule.

The rule does not encourage self-sacrifice or financial abstinence. It doesn’t mean pay yourself first and starve. Life was meant to be enjoyed. If you call on your financial genius, you can have all the goodies of life, get rich and pay bills, without sacrificing the good life. And that is financial intelligence.

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Paying yourself first while in debt