Pay Yourself First

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In a previous article, I briefly touched on the idea of creating financial margin in your life. I highlighted that only 37% of Americans have enough money in their savings to afford an unexpected $500 emergency, and in another post, I referenced that 78% of people in America are currently living paycheck to paycheck. Now, consider that according to a study from 2017, 75% of Americans have less that $10,000 in savings, and 57% of Americans have less than $1,000 in savings.

financial cliff

Based on those statistics, it is likely that many of you reading this not only identify with these statistics, but that you also desire to have greater financial stability in your lives. Hopefully, since you have read both of the referenced blog posts, along with “Making Your Lunch Has Saved You How Much Money,” not only have you been armed with several easy and simple ways to save over $5,500 per year, but you also feel inspired, and capable of implementing the same kind of changes in your life!

Along with the abundance of terror that screeches through my mind when I read these kinds of statistics, two of my most prevalent thoughts are what steps do I need to take in order to prevent this from happening in my life, and more importantly, as a new father, what steps do I need to take in order to help prevent my son from becoming one of these statistics.

For every person, the solution to both of these questions begins with adopting the practice of paying themselves first.

1) What does paying yourself first mean?

Paying yourself first requires intentionally setting aside a portion of your income before you use it on any other expenditures. This means that you are making the decision to set aside monetary resources for your future, which as a result allows you to begin reclaiming your life today. By choosing to implement this practice in your life, not only are you able to remove one of the most significant barriers to saving money, continually having to decide if you will save, but in addition, you have the opportunity to become an example to your children of what it means to live with financial responsibility.

2) How can anyone do this?

To get started, you need to determine how much financial margin you have in your life on a recurring basis. After reading “Trim The Fat Off of Your Expenses,” you will know that I recommend tracking your expenses for at least three months in order to gain a firm understanding of where your money is going.

After you have monitored where your money is going for a sufficient period of time, the next thing to do is to categorize your spending. As I have mentioned previously, my wife and I use Personal Capital to track our cash flow, monthly spending, and savings rate! While categorizing your expenses, your goal is to determine how much of your money is being spent on recurring non-discretionary items, which among other things includes shelter, insurance, food, diapers, wipes, and formula.

Now that you have calculated your recurring non-discretionary spending amount, it is time to apply some personal finance optimization techniques which emphasize choosing value. Although food is a necessity, are you providing sustenance to your family in an efficient way, or is your first inclination for dinner to go to a restaurant or order delivery? Although car insurance is a requirement for having a vehicle, have you optimized your policy and deductible? And not to be overlooked, although having a cell phone may seem to many as equally important to paying the rent or mortgage, do you really derive sufficient value from having your text messages turn blue to justify spending $80 a month?

(Be on the lookout for an upcoming post in which I will review some easy ways to optimize some of these specific areas in your finances!)

This really brings to the forefront the idea of value. Specifically, are you spending your money on things that meaningfully improve your family’s quality of life, because if you are not, then you are unnecessarily choosing to prolong your enslavement to your job, which requires you to spend your life earning money instead of actually living life with your family.

Now that you have completed these steps, the next thing to do is to automate your savings. The best way to accomplish this is to send only the value adjusted non-discretionary dollar amount to your checking account, and have the remaining income directly deposited into your savings account. Once you have diligently become accustomed to only spending the money available in your checking account, you will realize that your life has not diminished in any way, and that instead, the quality of your life is improving because you are steadily backing away from the proverbial financial cliff.

After you have done this long enough to have an emergency fund containing 6 months of your family’s living expenses, divert the extra income to your pre-tax retirement accounts instead! Some of you may be thinking that six months of living expenses seems like a large emergency fund. I do not disagree with you, but I am a very conservative individual, and as a result, I prefer to have excess financial margin in my family’s life.

3) Why do you need to pay yourself first

There is a common saying that nobody on their deathbed has ever said “I wish I had spent more time at the office.” However, how many people are making intentional decisions today in order to ensure that they are able to spend more of their lives having meaningful experiences and building relationships, instead of aimlessly working to earn money to spend on less than worth while things?

As life increasingly feels like it is passing by quicker than ever, I do not want to look back on my life wondering how or why I missed it. I look at my newborn son, who has already added another month to his life in just the short time that I have had this blog, and I am faced with the reality that I can not even fathom how quickly the next 5, 10, or 25 years will pass by. As a result, I am determined to ensure that I am intentionally living now in order to claim back my life from the metaphoric hamster wheel. One of the first steps towards personally achieving this goal begins with building financial freedom through creating financial margin in your life!

I leave you with this quote:

“As you take your eyes off the false prize (of more, better, and different stuff), you put them on the real prizes: friends, family, sharing, caring, learning, meeting challenges, intimacy, rest, and being present, connected, and respected. In other words, those best things in life that are free.”
Vicki Robin
Your Money or Your Life

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