Pay Yourself First
-
The problem with our American culture is that we’re all being cajoled into living like the hare in Aesop’s tortoise and hare fable.
Acting like the winner, without doing what’s needed to actually BE the winner, the hare scoots along ahead of the tortoise, then stops to yak with his buddies and squanders his lead and success up to that point while the tortoise steadily plods along and wins the race.
Taking a tortoise investing approach starting right now, with even as little as $50 a month could change your future financial state more dramatically than you might imagine. Instead of behaving like the hare with our cash flow and squandering it on whatever tempts us at the moment, start using the slow and steady savings approach, and win your race toward a more comfortable retirement life.
It’s amazing how much we ignore this concept of “Pay Yourself First,” meaning that with every piece of income you receive, the first amount that goes out, provided that you’re not seriously damaging any relationships with your creditors, should be to yourself either in the form of a balance transfer from your checking to a savings or investment account, or sticking a twenty-dollar bill in your shoebox.
In one of my past businesses, I ignored this Pay Yourself First principal to my peril. I was writing books and newsletters, and traveling around this country doing seminars with cash flowing in beautifully, I’ll never forget those great memories of watching my wife Carol write out those checks to all our suppliers with tears of thanks and happiness in her eyes. We were ecstatic, paying off all our suppliers right and left, and on time — paying everybody except ourselves.
We were so conscious of our reputation, and had such a guilt complex over being late with our payments, that we totally ignored ourselves. When we needed to buy groceries or make the house payment, we just dipped into our savings and took care of things. I mean, heaven forbid that we’d be two days late paying someone for office supplies.
But I never realized the faults of “paying ourselves last” until years later. If we would have been in the habit of paying ourselves first, we may have had a little less for our suppliers, but I’m confident we would have found a way to make up for what we took out for ourselves. An extra bit of business or a corner to cut here or there in our expenses could have made all it happen.
But it’s a common fault among entrepreneurs who are so passionate and optimistic about their business that they don’t see any need to invest their money anywhere other than in their business. The idea of putting money aside as a safety valve is absurd when you’re absolutely sure that your business is going to skyrocket at some point.
I mean, why worry about socking a few pennies away every month for retirement when you just know that your millions are just around the corner. That was my attitude back then.
Gotta Sock It Away Before It Slips Away
For five years running, my little one-man enterprise had nice cash flow up to $20,000 a month, and if I’d have just pulled out $500 a month during those years and stuck it in a portfolio of conservative stocks and mutual funds averaging a realistic 8% return, I’d be sitting atop a little silo worth more than $700,000 today. And to rub salt in the wound, 30-year U.S treasuries and bank CDs were paying 14% and more interest at that time in the early ‘80s which would have filled that silo up with more than $2,000,000.
So I ask you, if you’re not already paying yourself on a regular basis right now, how difficult would it be to automatically transfer, say, $50 a month from your checking account to a savings or investment account, starting the first of next month?
$50 too tough? How about $25? For those of you in a high income bracket, what would be a tolerable number that you’d hardly notice going out each month? $500? $1,000? In the absolute worst case, take the change you come home with at the end of every day and at least throw it in a jar. Too many people put their noses up at these habits, not because they can’t do it, but because they don’t believe these small amounts will ever build up to anything worthwhile.
You Don’t Miss What You Don’t See
If you’re constantly challenged by the difficulties of putting money aside for your retirement, welcome to the club. With most of us, there always seems to be something to write the next check for that takes priority over any savings discipline. So here’s a suggestion that can work well for you.
Set up an automatic withdrawal from your checking account into an investment account on a monthly basis. It may seem a little scary at first, but the secret is to start small with an amount you’ll hardly notice, say, $50 or 100 a month. Then, after you get used to no longer seeing this money, you can start raising the bar to slightly higher amounts.
In the beginning these small amounts may seem like chump change, but if you’re like most people who’ve taken this first step, after a couple of years you’ll be kicking yourself for not having done it all of your working life.
However, be cautious. If to take too much of a bite from your checking account right out of the gate, you could get discouraged and quit. We have to be trained slowly with new habits.
Look at it this way. If you want to keep spending all you have on short-term pleasures today, you’re going to have to pay for it with long-term pain tomorrow. But this rule also works in reverse. Go through a little short-term pain today by giving up a few niceties now in trade for more long-term pleasures tomorrow.
The Huge Cost of Waiting
Can you really let $50, $100 or $200 per month stand in the way of launching yourself toward a secure retirement for yourself—or seeing your children attend a college of their choice instead of merely one you can afford—or your elder parents living in a top-quality care facility instead of one of those decrepit places we’ve all heard about?
Why not take a look at your monthly expenses and cash flow right now to see what kind of an automatic deposit amount you can begin with. The sooner you start today, the more financially secure you’ll be tomorrow.
When time is on your side, you can build a substantial retirement nest egg with far less strain than by starting late and trying to play catch-up. Here’s an example—
An early saver, age 25, deposits $200 a month for 10 years and stops, resulting in a total investment of $24,000. After 40 years based on a compounded growth rate of 8%, that early saver has a $400,130 nest egg. A late saver who starts 10 years after the early saver, deposits $200 a month for 30 years for a total investment of $72,000. The result—only $298,072 even though the investment was three times as much.
Hard to believe this? Do an online search on “cost of waiting” and you’ll be served up with several sites showing detailed examples and charts where you can plug in your own numbers and see the results for yourself. It’s an eye-opening exercise.
