Pay Yourself First

The concept of “Pay Yourself First” was made popular in the book “The Richest Man in Babylon” by George Clason. The idea is that you “pay yourself” the first 10% of your income each month.

This idea resonates with a lot of people, but many get it wrong. For example, “pay yourself first” does not mean to treat yourself to a nice dinner or vacation with the 1st 10% of your income. That would be paying the restaurant first, not yourself.

The True Meaning

Pay yourself first means to put away money in an account that you never touch that will grow over time. This could be a money market or savings account that grows until you have enough to buy a protected asset such as real estate that will make you even more money.

Not Just Money

This concept is not limited to money. Pay yourself first also applies to fitness, recreation, and time with loved ones. Think of all of the human needs that you have. It is important to block out time to service these needs “first.”

If you are spending time doing favors for your boss to get “extra points” instead of working out; you are paying your boss first.

You will get a better idea if you really keep on learning through the journey of success in life and I should say that I am slowly starting to understand the true meaning of paying yourself first. From the Rich Dad Poor Dad book, it mentioned that people normally pay their bills, fees, mortgages and other payment first whenever they received their salary from their job. What they will do next is buy what they want with whatever left over and save the leftover money after spending. This usually become a cycle as they do it every month and almost every year without much money left to try and make a difference in their life through becoming their own boss or even making any significant difference in their financial status.

The next great mentor that I learned about the pay yourself first method from is T.Harv Eker. I have read his book “Secrets of The Millionaire Mind” and attended his Millionaire Mind Intensive (MMI) Seminar where he taught how to set up different set of money jars where you can manage your money better. Personally, I have implemented his money jars method and trying to fine tune my finance as I have quite a few debts that I need to settle but I can say it is very useful to me as it motivate me to check on my own finance along my journey to success.

Another place I got to know about this method is through the audio book “The Richest Man in Babylon” where it mentioned to save 20 percent of your salary every month and pay off your debts and bills after paying yourself first. I got to know this theory more in dept after listening to the audio book “The Law of Success” where it mentioned the importance of consistently saving a percentage of money every month as this will helps us build more confidence in ourselves and our sub-consicious mind will feel motivated also when we consistently see growth in our financial portfolio.

The most recent reading that I found that really stunned me is another book by Robert Kiyosaki, “Increase Your Financial IQ”, where he mentioned that the amount of money he pay himself first is about 80 percent of his monthly income. Can you imagine how much money that is to a multi-millionaire? He started with a small percentage of 10 to 20 and now is 80 percent. It is mentioned in his book that the purpose of paying yourself first is to let you create the opportunities for yourself by preparing your money in advance and it will somehow build up your confidence in a way. Robert Kiyosaki also mentioned in his book that it is important that we start with a percentage that will make us feel uncomfortable so that we will not sit in our comfort zone and stop thinking about making more money to grow our own financial mean. Remember no matter how small the amount is, set a percentage that will make us feel uncomfortable with and once you feel comfortable with it, increase that amount as this proof that you have managed to find ways to counter the problem of not having enough to use.

As I have shared with you so many sources of great successful people mentioning about the importance of paying yourself first, you should start building your own financial freedom account and no matter how small the amount is, make sure it stretch your mind and create some stress in your monthly finance. This will make you think twice about spending the amount of money you have left behind after saving and let your mind think of more ways to grow that dollar.

Personally, I have set about 23 percent of my salary in my saving account and you may be thinking why I have such a weird figure. The reason behind it is I do set aside some money with my girlfriend for our joint account and I do have my personal saving portfolio which I put money into. I will update again on this topic in future if I do make any significant increase after creating a permanent passive income stream.

I thought it was funny to read about himself and his wifes accountant and how she (the accountant) reacted when the couple wanted to take 30% of $1000 to invest instead of paying the bills. Even though they owed $1500 to creditors. The accountant became very upset.

This lesson about paying one-self first is something that very few do. They pay themselfs last, but think they pay themselfs first. The thing is that people pay themselfs what is left over. That is not paying yourself first.

It takes a certain kind of guts paying yourself first. Especially 30% of income. Robert Kiyosaki and his wife actually made money through business dealings and paid themselfs 30% before taxes. That takes real guts. Though I would guess the taxman got the first rights to the money on what was left over, before the other creditors.

But I can’t help it, I like Robert’s crazy way with money. It resonates with me and makes real sense to me. I like his creative financing schemes as well. I really do. Others thinks he is a total moron, I can’t agree at all. He is probably the sanest person out there.

This guy knows that in the end, yourself goes first in line. You only have yourself in the end. I find it (just as the author does) funny that we prioritize others more than ourselfs. People think that this is our responsibility. That is BS, I am responsible for me first. Always. Then I can be responsible for others. But I need to secure my ass first. How can I secure my own ass first when everyone else is entitled to my money before I am entitled to it?

So think about this:

Every time you get $1 in your pocket from business dealings, take 30 cents right of the top and invest it. Pay taxes on what is left and the other creditors. The creditors that are left when there is no more money, need to wait until you earn some more money. This makes you really productive. You have to be..hehe. You have no choice.

Creditors of importance are always:

YOU
The goverment
Banks and financial institutions
Other small time creditors.

If you are dealing with criminals and the Mafia then I would propose for you to stop dealing with those people. It can become a problem if you pay yourself and fall short of paying those guys.

Read the book by all means, you can never get enough of Robert’s refreshing view on finance and business.

I would like Robert to write a whole book on creative financing examples. I think that would have been a slam-dunk. I would have bought it directly.

With 18 books under his belt, and 26 million copies sold combined around the world, this millionaire self-help investment guru must have had a very strong dream.

Indeed, three of his books have been on the best sellers lists of The Wall Street Journal, USA Today, and the New York Times simultaneously. From his humble beginnings in Hawaii, Kiyosaki has today become one of the most respected – and controversial – businessmen and motivational speakers in the world.

Robert Toru Kiyosaki was born on April 8, 1947 in Hilo, Hawaii, the island’s largest coastal city. He is a fourth-generation Japanese American, whose father was a respected educator in Hawaii and served as state superintendent of schools while the young Kiyosaki was growing up.

After graduating from Hilo High School, Kiyosaki debated about whether he should attend the U.S. Naval Academy in Annapolis, or the U.S. Military Academy at West Point. Finally, he decided on enrolling in the U.S. Merchant Marine Academy in New York.

                         

Kiyosaki graduated from the Merchant Marine Academy in 1969 as a deck officer. Soon after, his brother volunteered to join the Air Force as part of the Vietnam War effort. Kiyosaki began to question his own nerve. “Am I a coward or not?” he asked himself. No, he decided. He was not a coward. “I didn’t have to go,” says Kiyosaki. “I volunteered not because I liked the war, but because it was the right thing to do.”

Kiyosaki began to look into joining one of the Armed Services, when a Marine Corps recruiter told him, “If you talk to them, don’t talk to me.” With that, Kiyosaki had made up his mind. He immediately enlisted in the Marine Corps in what would prove to be a life changing decision. “If you’re going to be successful in business, you have to find a place to develop character,” says Kiyosaki. “The Marine Corps did that for me.”

Living in Arizona at the time, Kiyosaki was sent to Vietnam as an officer and a helicopter gunship pilot. During his very first flight, he came into close contact with tracer bullets. After letting out a few expletives, a nearby sergeant told Kiyosaki that “his type” would not last long. “Mariners actually lost people in the war,” says Kiyosaki. “It was what was called a battle standard.”

Kiyosaki did survive his time in Vietnam, and in fact, was even awarded the distinguished Air Medal. In 1974, Kiyosaki ended his service at the Marine Corps Air Station in Kaneohe Bay, Hawaii.

After leaving the Corps, Kiyosaki went to work as a salesman for the Xerox Corporation. It was a less than glamorous career, and a drastic change from the war. Kiyosaki wanted more, and it would not be long before he got it.

The subprime mess is widespread, and it seems to be getting worse. It’s certainly worse if you’re about to lose your home.

The stock market is schizoid — up one day and down the next. If you’re a day trader, this volatility is pure heaven; if you’re getting ready to retire, it’s likely to give you a heart attack.

Big Deal

As for commercial real estate, it’s a great market. I just bought a 350-unit apartment house in Tulsa with an assumable loan at a 4.9 percent interest rate. Rents are low, the oil business is creating jobs, and demand for apartments is high.

As with any market, the real estate business is terrible for some people and couldn’t be better for others (like me).

But as much as I love real estate, I believe the biggest opportunity today is in silver. I think this precious metal is about to become the most spectacular investment in recent history — bigger than oil, even bigger than Google.

All That Glitters

Let me give you some reasons why:

• Silver is a consumable industrial commodity.

It’s used in computers, cells phones, and electrical relays. This means that as countries like China, India, and Vietnam, and regions like Eastern Europe, become more modernized, the demand for silver will increase.

Silver is also applied in medicine. One little-known use is as a bactericide, a role silver has filled throughout history. Today, medical devices such as catheters and stethoscopes use silver, and every hospital in the western world uses silver sulfadiazine to prevent infections.

• Silver is scarcer than gold.

Gold is hoarded. It’s estimated that 95 percent of all gold ever mined is still around. The exact opposite is true of silver: An estimated 95 percent of all silver ever mined has been consumed.

Forty-five percent of all silver mined is burned up in industrial uses. Jewelry accounts for 28 percent, and 20 percent has been consumed in photography. Only 5 percent is in coins.

• Silver supplies are down.

In 1900, it was estimated that the world had 12 billion ounces of silver. By 1990 it had dropped to 2.2 billion ounces. By 2007, the supply was down to 300 million ounces.

Some of the more pessimistic forecasts estimate that the world will be out of silver in about 10 years. This could be catastrophic to the world economy. In 10 years, silver might have as much of an impact on the world economy as $200-a-barrel oil.

A Safe Haven?

As a precious metal, silver is also money. And as the U.S. dollar drops, gold and silver are seen as a hedge against a loss of value. As more and more people wake up to the reality that their cash is trash, real estate is a gamble, and the stock market is too volatile, silver may be a great safe haven.

As I write, silver is approximately $13 an ounce. If industrial consumption continues and monetary panic sets in, who knows how high the price will go? Between 1979 and 1980, silver went to $48 an ounce. In today’s dollars, that would be the same as $80 an ounce.

And recently, exchange traded funds in silver have been added as a way for investors to hold silver. The reason I find the silver ETF so intriguing is because an ETF represents real money — not fake money like the U.S. dollar.

The ETF Solution

Prior to 1963, a U.S. dollar was real money that could conceivably be exchanged for silver. After 1963, it became a Federal Reserve note that was no longer backed by silver. A silver ETF is similar to old-time money, then, and as the U.S. dollar continues to drop in purchasing power these new ETFs may become the “new old money.”

The significance of the new silver ETF is that it makes owning silver simple and convenient for the general public. Owning silver ETFs is easier than owning physical silver, which is heavy and requires security such as a safe. And owning silver ETFs is safer than buying a silver mining stock, which can be risky.

Silver ETFs are also pretty straightforward: If silver is $13 an ounce, you buy so many ounces at that price. If the price of silver goes up, you make money; if the price goes down, you lose money. The risk is minimized because you’re buying physical silver — you aren’t buying a share of a silver company, which can go bust. As long as the ETF is honorable and protects your silver, your investment is secure. (A caveat: Silver ETFs haven’t proven reliable yet, so use caution if you take this route.)

A Rich Find for Investors

My prediction is that the industrial demand for silver will continue to go up as the wider world becomes more modernized. At the same time, as the dollar drops in purchasing power, the average investor will wake up to the convenience of owning silver ETFs and start to buy them.

Consequently, the ETF side will dry up the silver supply for the industrial side. Someday in the near future, then — maybe in two to five years from now — these two forces will collide and the price of silver will go up faster than anything on the market today.

Ryan McKenzie shares how he uses this simple principle to build up his wealth.  He has 10% of his monthly income deducted automatically from his bank account and deposited into his mutual funds.

When I look around at all of my friends, and a lot of my family, I see a lot of people living from pay check to pay check, under monetary stress. These same people watch the Calendar for payday like a hawk. Pay their bills, and then open up the spending flood gates, before they know it, they are itching for their next pay check. These same people are the people who don’t think they make enough money to build future wealth. They are wrong.

The way I save money, is by paying myself first. I have automatic deductions come out of my bank account on the 15th and 30th of every month, which I put directly into a mutual fund for safe keeping. I take a small portion of my pay check, roughly 10% and put it away. This may not seem like much, but over time it adds up.

In addition, with mutual funds you will have the benefit of compound interest on your side. You should EASILY be able to achieve 8% interest on average in a good a mutual fund, often times more. That’s $800 a year on $10000!

Once you start, you will be addicted. Watching your funds grow is incredibly addictive and will inspire you to invest a larger percentage as your income rises. If you have debt, put a portion of this percentage towards the debt and a portion into your mutual fund, so you have something positive to reinforce your automatic deductions.

The bottom line is this, if you have the money deducted in advance (and pay yourself first), you won’t miss it and you can go ahead and spend what’s left of your pay check week in and week out. You will be investing in your future wealth, and your mind will be at ease that you aren’t wasting your life in the rat race and never progressing.

Ryan McKenzie

One of the easiest and powerful way to accumulate wealth is to follow the “Pay Yourself First” rule, which was one of the teachings Rich Dad taught in Robert Kiyosaki’s “Rich Dad, Poor Dad”.

What does “Paying Yourself First” mean and how you can follow it?
Basically, it means you simply set aside a certain amount of money each month that you will not touch (pay yourself), even before you pay your bills and expenses (pay others)! 

Here’s a step by step guide which you can follow:
1.  From the amount of money you make each month, you decide how many percent of your monthly salary or income you want to set aside.  When you get your paycheck, the very first thing you do is to put this amount aside, hence the “pay yourself first”.
The percent to set aside differs from individual to individual depending on each comfortable level and wealth target. Most people recommend 10% to 15% of the monthly income to set aside, but I suspect that you might need to go up to 20% or even 30% if you want to reach your financial success.

2.  Decide what you want to do with this amount which has been set aside.  Many will simply put the amount into their saving accounts.  However, the idea of paying yourself first is to use it for your wealth building.  You should be looking into investing them instead of just saving them.  Saving alone will not help you to reach your financial success.  Let the money earn you more money by investing it.  Consult with your financial planner or advisor to decide the kind of investment portfolio that suits you.

I would recommend that you setup what is known as an automatic withdraw from your bank account to your investment institution for your investments.  This is when money is automatically taken out of your savings or checking account each month and put into your investment.  Generally, you have to select a certain day each month for when the transaction will occur, and it will happen every month on that day, just like paying your bills.  In this way, it does not rely on your ability to set aside a certain amount each month. It relies on the computers who automatically invest your money for you. It is also easy once you realize how you don’t miss the money.

3.  Next, you pay off your bills.

4.  Live on whatever is left over from your paycheck.  It does not however imply that you need to use up every single cents of what is left.  If you have surplus, then good for you.  If you have a substantial surplus, then go back and re-adjust your investment amount.  Increase you monthly set-aside amount for investment, and let it generate more money for you.

5.  And finally, NO CREDIT CARD DEBT!  Don’t spend on credit.  Also be very careful with home equity loans and car loans. It’s easy to get into trouble with both.

If you are disciplined, you can pay yourself first without running into a credit rut.

First, keep your personal expense low.  Don’t go out and spend your money on “ego” toys like a new car, a new outfit or a long vacation.  Not until the habit of paying yourself first has built up enough assests for you to afford them.

Second, when you come up short, don’t dip into your investment to pay off your creditors.  Robert Kiyosaki believes that if you are under pressure from creditors, the pressure will actually inspire you to come up with new ways of making money.  Look for other ways to tide over.

As you start to build assets, you will see that the income from your assets will allow you to pay for your personal expenses and expanded your means for you to live the livestyle you want. 

Paying Yourself First is a simple yet powerful concept.  It is so powerful that it could be apply to other area besides money.  You can apply these same principle to time.  Pay Yourself First if you are a busy working mother.  You need time to take care of yourself so that you can take care of your family!

 

If you are wondering if anyone is practising the “Pay Yourself First” rule, and getting results, check it out here.

OK, sounds great.  But how should I go about doing it, and how much should I pay myself?  After paying myself, what if I don’t have enough to pay the bill?

I am glad that Jessica Duquette shared her experience on this in her blog.