Wealth happens slowly over a period of time when you turn surplus cash into investments that produce more income. However, you must put aside some money each paycheck to build up this lump sum, and you do this by paying yourself first. It is virtually impossible to accumulate great wealth without using this method. The idea is that if you pay everyone else — the landlord, credit card company, utilities and shopping — before you pay yourself, there is a higher likelihood that you'll never have anything to put in the bank because there won't be anything left. The simplest way to fatten a small purse is to put some predetermined percentage of your income into a savings account before you pay anyone else.
Reaching Financial Goals
Even if you are living paycheck-to-paycheck, you must get into the habit of setting some amount of money aside toward a savings goal, and paying yourself first is a tried-and-true method of reaching financial goals. Let's say you want to save $2,000 in a year. You break that number down to monthly goals and a per-paycheck goal. If you are paid weekly (52 times a year) that means before you pay any bills or make any discretionary purchases, you funnel $38.50 to a special savings account. It may require sacrifice, but after you develop the habit, you will be pleasantly amazed at how the money piles up.
Feeling of Security
As you begin to see the numbers in your special bank account grow, you will experience a new feeling of security that comes with knowing that you are in control of a pile of money that belong to you alone. It will become more natural for you to want to pay yourself first as you begin to realize that the money is the only portion of your hard-earned paycheck that truly belongs to you. And in a worst-case scenario, you also have this money to help handle an emergency.
The capital you need to make investments in stocks, income-producing real estate or a small business will come from the money you have faithfully paid yourself first over a long period of time. The money you set aside when you pay yourself first should never be used for any purpose other than to purchase investments that will appreciate in value. Money for items such as cars, vacations and shopping should be budgeted along with other household expenses.
If you are an employee, you are actually paying yourself second each time you receive a paycheck because the government has already taken a nice chunk of taxes out of your check. The government already understands a thing or two about the importance of getting paid first and withholding taxes are its way of getting to the front of the line on payday. But you can still put yourself ahead of Uncle Sam by setting up a pre-tax retirement account such as a 401k, 403(b) or an IRA. Contributions to these accounts are not taxed. The withdrawals are taxed when you retire. By saving a percentage of your paycheck in a qualified retirement plan, you can turbo-charge your retirement nest egg by benefiting from a tax break now and the magic of compound interest over time.
- Creatas/Creatas/Getty Images
- Steps to Break Debt Cycles
- Should You Pay Off Your Mortgage or Invest the Money?
- How Much Should People Save From Each of Their Paychecks?
- Objectives of Family Budgeting
- Money Management Advice
- The Best Practices for Paying Off Credit Card Debts
- How Much of My Net Paycheck Should I Be Saving for the Future?
- Mortgage vs. Savings