Pay yourself first is at the core of building wealth. If you don’t set aside money to save, invest or pay of debt (and then save and invest), you will never build any substantial wealth.
You have to balance your budget so that something remains at the end of the month to sock away in whatever vehicle it is you choose (just not a sock or the piggy to the side); to build yourself a nest egg, an emergency fund or any other financial goal.
Nowadays, it seems “pay yourself first” has become synonymous with “Let us help you, pay yourself first”. As a matter of fact the message now is more like “Let us help you pay yourself first, because if you don’t let us help you it will never happen”. Btw, all for a modest fee of course.
There seems to be this new “belief” that most Americans are now too weak-minded to handle their finances themselves. Somehow we’re told that we’re not capable of taking care of ourselves and we need big financial institutions do it for us. And they are BIG:
- Money in 401(k)s: over 4 Trillion dollars
- Total amount managed in Retirement market: 23 Trillion managed in US retirement funds.
All of this money is managed by people that are supposedly much smarter than us taking care of this money. Yes, I’m sure these people are smart and have a lot of experience and yet, most of them do not seem to be able to beat the average annual return on the stock market. They are happy nonetheless to take your money every year (that modest they ask for helping you “pay yourself first”) and try it over and over again.
Those modest fees aren’t always that modest. These plans and funds are products. Products that didn’t appear out of thin air; there are people that think them up, there are people that package and promote them, there are people to sell them and then there are people that manage them. There has been a recent flurry of articles about how much you lose out on in a 401(k) due to the fees you pay over the many years you pay them. PBS has a nice presentation to walk you through. It runs up in the hundreds of thousands.
I’m not going into all the pros and cons of 401(k)s, but what I will tell you is that these are not the only vehicles to pay yourself first.
It is my believe that you can pay yourself first without someone showing you (for a “modest” fee) how to do it. Anyone can open their own discount broker account and any one can invest their money in a low cost index fund (SPY has been treating me pretty well). An index fund that btw outperforms most of those smart people that want to manage your money.
All it takes is discipline; discipline, to send that money every month to your own investment accounts instead of sending it to some account opened by someone else, an account with products also managed by someone else. It takes discipline to invest your own money you set aside for your kid’s education. It is all about mindset. If you have the discipline to pay your mortgage on time every month, you can muster the discipline of paying yourself first (all by yourself).
I’ll tell you one even better: If you don’t have that discipline you better learn to get it. If you don’t have the discipline to pay yourself first today, how will you handle that money once it does become available to your when you turn 59 (and a half)?
Paying yourself first, so you can support yourself in the future (or pay for your child’s education) is AS IMPORTANT as paying that mortgage. What’s the point of owning a house if you can’t pay to heat it when your retired.
If you want to succeed and financially survive in retirement, you need to build that discipline to pay yourself first. If you want to succeed and be able to pay for your children’s college, you need to build that discipline to pay yourself first.That self-taught discipline will serve you well when you’re done paying yourself first and you start managing all that money you paid yourself first.
I know it can sound a bit daunting to do your own investing but Investing in index funds is neither brain surgery nor rocket science. If you can open a bank account, you can open a broker account.
I’m not asking you to drop contributing to your 401(k) altogether. Don’t, there actually is some benefit from getting matching dollars from your employer. I’m not telling you to stop contributing to that 529 college plan, there are tax breaks that may work out for you.
All I’m asking is to not blindly buy into the myth that you don’t have the discipline to pay yourself first. Even if you don’t, you better find out about it now and do something about it.
Where and how do you start you may ask? Well there is many ways to pay yourself first.
Let’s take two scenarios:
- You’re not paying yourself first in any way, form or shape yet.
- You’re already being helped paying yourself first for that modest fee.
In both scenarios the assumption is you do not have credit card debt. If you have credit card debt, pay it off first!!
Looking at the first scenario you of course first need to allocate some funds to pay yourself first. If you already find you have some funds left at the end of the month, great, we can start with that. If you find you don’t have any funds left you can check out my posts on Budgeting which will possibly allow you allocate funds to pay yourself first.
The easiest and one we are probably all familiar with is the good old savings account. I’m personally not a big fan as there aren’t a lot of returns on a savings account but it’s a place to start. Maybe you start here and once you find yourself in the rhythm of paying yourself first you start looking to place this money elsewhere.
Better places in my opinion to put your “Pay yourself first” funds would be in broker accounts in which you could open a regular taxable trading account or something like a Roth IRA account. These accounts give you access to low cost index funds like SPY, QQQ and DIA. Since I’m not a certified financial planner I’m obliged to tell you to seek advice from one on this topic.
In the second scenario where you are already being helped paying yourself first (most likely via a 401(k)) you could consider diverting some of that money to privately held investment accounts. Again I’m not recommending forgoing the 401(k) altogether, especially if corporate matching is involved. But I personally don’t think you need to max out on your 401(k). Possible lower your contribution somewhat and redirect that money from your paycheck to your own accounts.
This is where the discipline comes into play. It would be tempting to spend that extra money in your paycheck on other cool stuff.
If you don’t have the discipline to do so I would recommend working on getting it.
Good luck reaching your financial goals.