Pay Yourself First
A lot of people ask me to teach them how to invest in the stock market.
The first I ask them is whether they pay themselves first.
Most people look at me like I'm crazy.
What does "paying myself first" have to do with investing?
If you cannot master this beginning concept, then you are not very likely to have any money TO invest. Game over!
Until a few years ago, I really didn't understand how paying myself first really worked.
Give yourself money before you give anyone else money.
Does this mean that you should NOT pay your bills?
It could, but I don't think that it should.
Where did your money go?
Aren't there ALWAYS places to spend your money? Can you ever have enough money to buy all of the things that you want?
When there are always easy opportunities to spend money, most of us spend it.
Some of us might go through a period where we "behave ourselves" and follow that plan perfectly, but eventually we'll act like someone who is starving and spend foolishly.
"I'll save whatever money is leftover."
That almost NEVER works! Why? We spend what we have. There are always things we "need."
Money disappearing is an older trick than anything Houdini ever performed, and we play that trick on ourselves.
So what do I do instead?
When you first get money, set aside some that you will NOT spend. In fact, it's probably a good idea to put that money in a place that requires you to make an effort to spend that money.'
Why?
We have to spend on our bills, but we tend to want to spend on things that we want. If we want something badly enough, we're likely to make all sorts of excuses why we "need" that money now.
If we have to go to a bank, a brokerage, or a friend's house, we have to spend energy and time. This gives us a chance to think about whether we REALLY "need" that item. At least, it forces us to consider how badly we want it.
If you work, you probably can have a certain amount automatically deducted from your paycheck and have it placed directly into your savings account (or some other investment account).
"But I need all of the money to pay my bills."
I can't tell you how many times I've heard THIS one.
In fact, I've said it, myself, in the past, and I really believed it!
There are two things to consider for this.
- Try it! I bet that soon enough you'll get over "not" having that "extra" money. This is especially true if you do not have a budget. (Don't lie...Most of us say that we have a budget, but we don't really know all of our expenses.)
- You won't yell at yourself. If you don't pay your electric bill, they will either harass you until you pay it, or they will simply shut off your electricity. So you're motivation is clear. You HAVE to pay other people, but you won't yell at yourself if you "miss" a payment to yourself. Therefore, you will find it easier to cheat yourself.
We need to pay ourselves first, because we won't pay ourselves when we're under pressure later.
If you owe someone else money, and that person might call your workplace, I bet that you'll figure SOME way to get that money, especially if it might mean that you'd lose your job.
We only push ourselves when (we perceive) other people push us. It's only a problem if someone or something makes it one.
"But I can't save very much."
If you cannot set aside very much at first, that's fine.
In fact, I suggest that you start with a small amount, just to get the habit started.
One of my favorite things to mention to people is that $20 = $1,000.
This requires an explanation, because even a poor Math student knows that the statement, by itself, does not have any merit.
However, let me explain...
If you save just $20 each week, this will add to over $1,000 (actually $1,040) every year.
Calculation: ($20/week) * (52 weeks/year) = $1,040/year
You will not be able to retire on that, but that is more than many Americans have in their savings account.
If you do that for five (5) years, now you're starting to accumulate a good chunk of change.
Don't feel confident setting aside $20/week? Try just $10 (or $20 every TWO weeks).
The most important part is that you'll see that it really isn't all that hard, and it won't be long before you see the payoff.
However, if you don't do this, you probably won't be in position to invest.
Pay yourself first. That's the FIRST thing that I tell everyone.
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