Paying yourself first, for real

    I finished reading Robert Kiyosaki's "Rich Dad, Poor Dad" last week. It was eye-opening.
    There are many things that the book made me think about that I will go into further in later posts. But in this post I want to talk about the concept of paying yourself first.
    From reading other financial books and thoughts from other finance bloggers, it seems that paying yourself first simply means making automatic deposits to savings every month, week or payday.
    That's what I thought I was doing with my paltry $50 a month savings automatically withdrawn from my checking account to my savings account. It was surprising how quickly I saved $1,000 this way, but I usually just raided savings when I ran low in checking and still had bills to pay.
    Kiyosaki says that his Rich Dad taught him it's more important to pay himself first, before his creditors or even the government. Kiyosaki asked how can you do that, especially if you have little money. Rich Dad told him how is not important, but why is:

"After paying myself, the pressure to pay my taxes and the other creditors is so great that it forces me to seek other forms of income. ... That pressure made me work harder, forced me to think, and all in all made me smarter and more active when it comes to money. If I paid myself last, I would have felt no pressure, but I'd be broke."

    At first, I shrugged this off because I obviously have no choice but to pay the government first -- taxes, Social Security and the like are taken directly out of my paycheck. But then I started thinking about it a little more.
    Maybe pay yourself first means to do something to build up your own financial life before you do it for other people and their companies.
    For example, you take your NET pay (paycheck after Uncle Sam gets his cut and you pay for health insurance) and then decide how much money you want to use each pay week or each month to use solely for you. Maybe you put some money in an IRA, donate some to your favorite charity and put some in your emergency fund. THEN you go about paying your monthly bills and making sure you have a cushion for unexpected or occassional expenses. So, if after paying yourself you don't have enough for those things, you either have to make more money or cut your monthly expenses.
    In other words, you don't put what you "pay yourself" in your monthly budget, you work with your budget AFTER you paid yourself. Otherwise, any extra work you do or income you make is just going to pay someone else.

See what I mean?

    If my net income is $2,400 a month and I use $400 a month for me -- saving for retirement and the like -- then I only have $2,000 a month to work with. If I can't stretch it to cover everything then I have to decide who I will no longer pay each month -- maybe it's the cable company. Maybe it's Starbucks. Maybe it's the grocery store. Whatever.
    That might not be earth shattering to many of you, but it was to me. When I budgeted what I "paid myself" it was really easy to simply change that when I ran low on cash. But if I never counted that money to begin with and knew I couldn't just transfer it out of savings, I'd be forced to be a lot smarter about my money.
    It's a practice I haven't started yet, especially considering I wrecked my budget for March and still can't figure out what went wrong.
    As many of you know, I am all about getting rid of my debt, which has been going very well so far. But I also want to jump on the compounding bandwagon. I'm not even 30 so I have time.
    Perhaps this is all too ambitious right now. I'm still wearing debt shackles and need to free myself from that.

Any thoughts? Thanks!

Comments

[Les]

I have ALWAYS heard that, but only tried to implement it right after Christmas. My problem has always been that if I can get at my savings, I WILL, so I shopped around for a new bank that would keep me OUT of my savings somehow. None would allow a "locked-in" account that I couldn't touch, because the paltry amounts ($20 per paycheck) I could manage to put in were far below the minimum required, but I finally found one that disallowed debit card use, and wouldn't allow me to withdraw any of my savings without going to the teller window and showing several pieces of ID and signing several forms. As the bank was conveniently located in the same mall I work in, I was concerned that I would get my savings anyhow, so I stopped carrying any ID with me at all, just my bank card, so I could deposit at the teller with no withdrawal priviledges. I was impressed with this bank for trying to help me save, and because of this I opened a companion checking account from which to pay my bills online. The wonderful lady that opened up these accounts for me GUARANTEED that even I could not get at this savings account easily. I'm not kidding, she actually said, "I GUARANTEE that you will not be able to TOUCH this money without going to the teller and producing photo ID and signature." She DIDN'T bother to inform me that since I had internet banking set up and could SEE the savings account, I could TRANSFER the money to the checking account online. Knowing full well what would happen if I tested this, I of course, like an idiot, transferred it (yup, it worked), and kissed a hard-earned and even harder-saved $200 bucks good-bye (at least it was on bills, but still...)in a matter of 24 hours.
I stomped in to the bank to complain that I'd been LIED to, was told *I* must be lying because they don't do business that way, and when I very angrily demanded to close the account, was informed of the before-never-mentioned "account closing fee", which amounted to more money than was even left in the checking account. Am I pissed? Oh, yeah.

I'm now searching for a bank that will allow me to automatically send money to a savings account in a different bank,so that I can't see both accounts online, but so far can't find one.

It really didn't "hurt" to put that $20 away every paycheck, though, honest (in my case, it's the staying out of the account that I have a problem with), so maybe if you treat it as a "bill", which I did, you may have no problem doing that, and still sticking with the rest of your budget. At least, if you found it too difficult, your money would still be there instead of blown somewhere else. Worth trying, no?

(Oh my GAWD, what a long comment - I'm sorry to hog your space!)

[Jared]

Paying yourself first is one of the most important principles of good personal finance. It's also one of the least followed principles, in my opinion, because too many people do what you mentioned above - they think about paying themselves after all their other expenses and purchases are taken care of. They pay everyone else first! We mention this topic frequently at my blog and it's one of the differentiating features of the financial web app we're creating at Firevalt. In our web app, "Pay Yourself" is a default category under Monthly Expenses that automatically deducts a certain percentage of your income from the monthly cash flows. Then the user is forced to budget and plan for the month with the pay yourself money already deducted. It makes paying yourself first the number one priority instead of an afterthought that's only considered if money is left over after paying everyone else. Good job for recognizing how important it is and writing about it so others can realize its importance too!

[bloomingyou]

Hey if you are looking for another good book to Read try Dave Ramsey's Total Money Makeover! An Excellent Read!

[mapgirl]

It's true. I regret not paying myself first when I was younger. I did at one point have a 401k plan, but I cashed it out when I needed the money (was basically laid off). If I had a cash cushion saved already, I probably wouldn't have had to cash out the retirement funds, and I'd be about $10-15K richer now.

[calgirlfinance]

I used to have the same problem as you, always spending my "savings". However now, I have my savings automatically direct deposited to ING Direct (many companies will allow you to direct deposit to multiple bank accounts) or you can set up an auto-transfer from your bank account to ING Direct the day after you get paid. Since it takes a couple of days for the money to transfer from ING to my regular bank account, it's harder for me to simple move the money from my savings account to my checking account. In fact, since I've started using ING as my "emergency fund" I've never moved money from ING to my regular account.

[CityslickerMom]

Like your blog, I like the stuff you talk about. We're trying to stay debt free as well.