Pay Yourself First (like a millionaire)
Pay. Yourself. First.
This is one of the most important concepts of how to build wealth often gets confused. I mean, isn’t every dollar you make technically a dollar that you are paying yourself? Actually — no.
Being wealthy, just to make sure we are on the same page does not mean having a Lamborghini, a mansion, or buying a bunch of stuff whenever you can and whenever you feel like it. Being wealthy is actually about time.
I assume you are either working or a student in school who will go on to work. Eventually, you will want to retire. Retiring is a way of saying that you're wealthy enough that you no longer have to work. This is the modern-day idea and goal of someone who is wealthy. They own their time.
Rich vs. Wealthy
The difference between fake rich people and wealthy people is discipline. Wealthy people are very disciplined when it comes to purchasing stuff. They will buy a Lamborghini only if they have previously purchased an asset that is paying them. Before they buy anything with their actively earned cash, they save. They look for easy ways for their money to make money. This is the idea of paying yourself first.
You want to ensure that you are saving a portion of it for your future self for every dollar you make. From here, that wealth will accumulate and grow until it can one day replace your full-time income.
I’m not most proud of the fact that I made over 7 figures just last year. Instead, I’m most proud that I saved the majority of those profits and invested them. I’m already seeing dividends and growth. I've always had this attitude because I only have to work by choice, not because I have to.
Right now, I live in a van. My average living expense per month is around $1,500. Considering this, I am well past the modern-day monetary benchmark that one must hit before retiring. My real estate investments alone bring in enough to cover our cost of living. Could I just be done and retire? Sure! However, I’m 32 years old and I have bigger plans.
To make one thing clear, I’m not doing van life to save money. I’m doing it for the thrill and adventure.
How Wealthy Do You Have To Be To Pay Yourself First?
The most amazing concept about paying yourself is that you don't need a lot of money to do it. You only need to allocate a percentage to your future self. Typically, this is in the form of an investment account like a Roth IRA, 401K, etc. Before the money hits your bank account, you need to make sure it gets invested.
One of my friends from Ireland, Tyler, has a cool system set up. 70% of all of his money is paying himself first. The other 30% is used to do whatever he wants. This is amazing! I love this system.
That being said, 70% is a lot. At my first job out of college, I made $27,000 a year which is not a lot of money when you have to pay for a half-decent place to live. I also dabbled in teaching dance which brought in an extra $6,000. At the end of that year, I had $3,000 in the bank. This means I was paying myself 10%
You do not need to have a high income. You do need discipline.
The math in this equation is your cost of living. Some things you can optimize and lower the cost of; others you are going to be stuck with.
Living Within Your Means
When my wife and I bought our first house, we got a mortgage for a $150,000 condo in Iowa. To put it bluntly, most people do not live within their means and you can often tell from the house they live in. Most try to get the max and leverage themselves. Contrary to this tactic, my wife and I made sure that just one of our salaries could cover the mortgage of our condo. It was a nice place and worked great for us. We could’ve gotten a house 2 or 3 times the price but we didn’t. We chose to live way under our means which allowed us to save more, okay ourselves first, and increase our net worth.
If you choose to live outside your means, it will be impossible to pay yourself first. This means that if you need to size down, size down! If you need to get roommates, get roommates! If you need to live at home while you build your emergency fund, live at home!
Detaching your ego from things like the house you live in, the car you drive, and the clothes you wear is the first step. Unfortunately, western society has convinced us that we need things to be happy. In reality, your identity is not what you own or what you have.
You can make these changes today. First, take a look at how much you are paying yourself. If this number is any lower than 30% of your net income, you're going to need to get scrappy. Consider cutting out small, unnecessary costs like TV subscriptions. You’ll be amazed at how much you can save!
If you want to live paycheck to paycheck, don't listen to me! If you want to be financially free, you need to pay yourself first! It’s not easy stuff but I promise it is the most guaranteed way to set your future up for financial success.
Thanks so much for reading.
Peace and God bless.
Leave a comment