I was watched this video by Tony Robbins and it sent chills down my spine. Start this video at around 8:00.
The Too Long Didn’t Watch of it is that he’s known TONS of people who made millions of dollars but ended up broke and bankrupt. He mentioned examples like the highest paid actress of her time, a top actor in The Godfather, Marvin Gaye, Michael Jackson, a top athlete from the Boston Red Sox, Floyd Mayweather, and Mike Tyson who made $500 million.
How is that possible?
It’s quite simple. They spent more than they earned rather than saving and investing their money.
There’s so many more I know of that he didn’t mention like the rapper 50 Cent or the teen singer, Aaron Carter, who made $100 million before 21. Tony said that he learned that Floyd Mayweather literally would spend every cent he would make after he earned it from a fight and repeat.
Saving money is more important than ever now that we’re bombarded with peers showing off their excessive spending on social media and because we live much longer than ever before after retirement.
And the key to doing so is a concept called paying yourself first.
Having read a ton of personal finance and wealth books, none of this is new to me. Having said that, I often stray from what I’m supposed to do and forget. I want to constantly remind myself because it’s easy for you to forget and overspend.
If people can go broke making hundreds of millions, you can too if you don’t budget and control things.
One of the laws for wealth and abundance is simply to spend less than you earn is put away and used to make more money.
What Does It Mean To Pay Yourself First?
Paying yourself first is a timeless finance concept that dates back decades to old books on personal finance, like The Richest Man In Babylon. But what does it mean?
Pay Yourself First Definition: when you take a percentage of what you earn off the top of a paycheck and immediately put it into savings for yourself before you pay any expenses. Paying yourself first is key to budgeting.
You can’t spend it on things that rot or deteriorate like consumer goods like clothing. It must be saved for your savings account, retirement, debt-reduction, invest, or to make more money in the future.
This is not to use in the short-term. This is a long-term, “don’t touch” amount for your freedom fund.
This is the very first thing you take out of your paycheck. You make it a priority over everything else.
You may think you already pay yourself first. Maybe you buy fast food or clothes for yourself. But that doesn’t count for two major reasons:
- You’re usually using this money after you have paid for other bills, like mortgage or rent. It has to be the very first thing you take from your earnings
- Usually, it has to be invested into something that will make you more money over time. Fast food usually doesn’t do that.
themselves first already, but they really don’t. You are not paying yourself first if you first spend on consumer goods, bills, debt-reduction, or anything else. To actually do this, the very first thing you take off your income should be set aside and put towards an investment in yourself or future.
It’s common sense. But common sense isn’t that common.
It’s very simple but most people don’t even consider doing this. Those who do can have a tough time doing this because they’ve never saved before.
For most of you reading this, I trust you have the willpower to do this.
This is the magic of investing and compounding. There are countless stories like this from books like The Millionaire Next Door or the Automatic Millionaire. These people never make more than $40,000 a year, but they become a millionaire over decades by investing, growing, and compounding this money they set aside.
I’ve written about what to do with this money you set aside in other articles. This one is simply about emphasizing this concept and explaining why it’s so important.
Paying Yourself First With Your Money and Personal Finances
How much should you pay yourself first?
As much as you are comfortable with on a consistent basis. You don’t want to commit to so much and then realize you can’t sustain that rate.
For some people, they can only get by paying themselves first on 1% of their income on a weekly or monthly basis because of their debt or other reasons. Then, that’s how much they should do. Take it right off the top so you don’t even see it. Set it and forget it (here’s a great article by Ramit Sethi that goes into detail about this concept).
I suggest starting small first to get things going and to commit. And then, you can slowly increase the contribution at a comfortable rate.
My goal is to save as much as I can to max out my Roth IRA and 401k every year. My next goal would be to save enough liquid cash so that I can live comfortable for at least two years in case shit hits the fan.
If you don’t know what a Roth IRA or 401k are, these are basic retirement and investment accounts, which have a government annual limit for how much you can contribute. Just Google them to learn more. You should attempt to max out your contributions of these as young as possible because it really grows over your life time thanks to the power of compound interest.
There are only two ways to have more money to pay yourself first:
- Find ways of cutting expenses.
- Earn more.
Both are important. As hinted at, I’ve seen the extremes of when people master one without the other. I’ve seen people who earn crazy amounts but can’t save, and people who have cut back expenses to extreme levels to live almost like they’re homeless yet won’t consider the possibility that they could earn a lot more too.
I prefer earning more because there’s an almost infinite upward possibility to earn more, buy only so much you cut back on until you hit zero. It also gets increasingly tougher as you start cutting back on purchases that negatively affect your quality of life, like lattes. That gets increasingly tough when your main goal in all of this was to increase your quality of life in the first place. That’s why I don’t like some of the extremist personal finance bloggers, YouTubers, and authors like Andrew Hallam who made a modest teacher’s salary but cut expenses to the bone and claim they didn’t mind the drop in quality of life. I don’t buy it.
Tips for Cutting Your Expenses
One tip for cutting back is to cook from home. There’s this inspiring video series I found where this man shows you how you can live off $3 a day and still eatgourmet level meals. You can watch the first of his series below:
Most people spend up to $60 a day eating out. This guy is killing it with $21 a week.
I can’t cook at all honestly. But I’ve used his videos as a model and have been successfully able to make banana pancakes and decent chicken recipes. He’s done a good job debunking a lot of excuses to why we don’t cook, like lack of time.
Having said that, I’ve tried his advice out for a few months now and it’s not all peaches and rainbows. It still takes quite a while to wash the pots and pans, buy the groceries, not butcher a recipe, and find something that suits your taste palette. Overall, I’ve progressed in my cooking thanks to his teachings though.
Another quick tip is to stop buying bottled water.
For years, I was convinced that bottled water was cleaner and more filtered because a classmate told me. My mom was mad at me for how much bottled water I bought on a monthly basis. Because I was fed up with her whining, I chose to prove it with a scientific essay filled with evidence as one of my English projects. But after looking at the studies, I found out she was right.
American tap water standards are usually a lot higher than bottled water. My whole belief was a complete placebo effect. There are plenty of studies that show this, like this one from Cleveland, Ohio, which reveals only 5% of bottled water there falls within the required tap water purity guidelines.
I think my false belief was partially influenced by all the marketing these bottled water companies do to make money.
Now, if you don’t live in a first world country, bottled water could actually be much cleaner. When I visited China ten years ago, all tap water had to be boiled before you drank it or you would get sick. Their plumbing system wasn’t advanced enough so that the water came purified. But just take a look at the research for where you live using Google Scholar before you decide.
I was buying at least 2 cases of bottled water a month, if not more. That was $50 to $200 that I was needlessly spending.
Tips for Earning More Money
So what about making more money? Well, there are plenty of books, articles, and content out there.
One quick tip is the law of 1%. I try to be 1% better every day at a skill that will move me more towards my goals.
This could mean 1% more fit.
In this case, it means you are 1% more business-savvy. Or 1% better at communicating. Or 1% better at your job.
1% might not seem like a lot on a daily basis. But over many years, you become hundreds of percent better. That’s how you get ahead.
Paying Yourself First Applied to Time Management
The “Pay Yourself First” concept can be applied to more than just money management. One of the world’s wealthiest living copywriters, Gary Bencivenga, explained that you can use this to manage your time too.
Before you start your day, right off the top, require yourself to devote at least one hour to the most impactful activity that will make you the most money and/or move you towards your biggest goal in life.
I already knew about this prioritization trick, but I never realized it was also “paying yourself first.” I highly recommend it.
For Side Hustles and 9-to-5 Work to Entrepreneurship
Paying yourself first can be applied to starting a business on the side while working a full-time job. Many people make the excuse that they have no time to start a side business. Yet they somehow have tons of time to make another person money.
Why not pay yourself first with time and devote the first hour of your day to the side hustle before anything else? If it’s the most important priority, why not start your day off with it before you do anything else? That way, the less important priorities are the ones that get less time because you start them later in the day and end the day before you can finish them.
Paying yourself first is a well-known and respected term in the personal-finance world for good reason. Lately, it’s been applied very effectively to other fields, like time management and earning more money. Try it ou.
Have any questions? Let me know in the comments and I’ll try to answer them for free. But make them good questions! The quality of your success depends on the quality of the questions you ask.
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