It’s time to talk about what Pay Yourself First really means. Before I get started, I want to mention again that I AM NOT A FINANCIAL ADVISOR. I am simply sharing my experiences with you, what has worked for me, and giving you another perspective. Please don’t do something foolish and say, “The 5and2Guy told me to!” I am sharing with you what has worked for me with hopes that you can take the information and make solid choices for your own lives. Now, let’s get to it!!!
Back in January, my Rich Dad Poor Dad post talked about the book that changed my life and helped me set a strong financial foundation. In that post, I introduced the Pay Yourself First concept and the Pay Yourself First Buckets. I want to be clear. I just introduced them for the first time on 5and2Guy.com. I did not come up with the concept. Men a lot smarter than me shared this via their books and I just adopted it. If you didn’t read that Rich Dad Poor Dad post, go back and read that one real quick. It is sort of a prequel to this discussion and the topics for the next 3 weeks.
What is Pay Yourself First?
Pay Yourself First is an approach to handle your money once you get paid. This approach says that before you do anything with the money you receive, you should take a percentage of that money, and put it somewhere that will pay you back. Put it somewhere where it will earn more money and do the most good. Then you spend the rest of the money on everything else.
The concept is that if you do this, you will never be broke. You will form a habit to put money places where it will earn you more and do great things. Jim Rohn use to preach, “Never spend more than 70 cents out of any dollar.” That because he was saying Pay Yourself First. In the spirit or Mr. Rohn’s advice, it is suggested you take 30% of your money and Pay Yourself First and then spend the other 70% on everything else.
What Do Most People Do?
The majority of people DON’T follow a Pay Yourself First approach to finances. Here is how the majority of people approach finances and how they spend their money:
1. Pay bills
2. Buy luxuries, dinners, experiences
3. Save what is left
That is a simplified summary of what they do, and there are surely some variances out there. But the majority of people follow that approach. Believe it or not, there are some people who swap #1 and #2 above and actually pay their bills after they spend their money on their wants and desires. Ouch. As I tell my kids, “Make a better choice.”
The problem with this approach is that the last thing on that list, the savings, never occur. Or if they do occur, not much money is saved. A survey performed by GoBankingRates back in 2016 showed that 69% of Americans had less than $1,000 in total savings. That is because #3 on the list is the highest on the list their savings ever gets. Which means, it never gets a chance to grow. And when an emergency hits that cost more than $1,000 to fix, they use their credit cards. Another not so good choice. I speak of this, not because I am better than any of them, but because I once lived my life the same way.
I Can’t Afford 30%!!!
You are probably thinking to yourself, “I can’t afford 30% of my money to Pay Myself First.” I completely understand, but the percentage is not the focus here. The 30% is a worthy goal, but most people cannot do that. You could start with just 3% to get started. You would be surprised how this little bit of money can start a habit that can get you out of debt and on the road to financial stability and even freedom. Once you establish a plan, using that 3% of money, you can then up the percentage as your financial situation improves.
How Does This Work?
It is quite simple. Remember above where most people are paying their bills first, buying luxuries second, and saving what is left? Here is the new approach:
1. Put Pay Yourself First money in the Pay Yourself First Buckets
2. Pay your bills
3. Spend what is left
You see what happens there? You are prioritizing money for yourself over everything else. You then pay your bills and spend what money is left on your luxuries and desires. This might result in a situation where there is too much month left at the end of the money. I understand and have been there. But guess what, lots of people have too much month left at the end of the money, even if they only save what is left after bills are paid and desires met.
With this approach, you are starting a habit of putting money aside that will grow and be available to you when you need it. For people who don’t pay themselves first, they don’t have much money when the emergencies come up. So they go more in debt, borrowing money, running up credit cards, etc…. Pay Yourself First will help you become financially stable, but you have to get started.
The Money Mindset
Another great thing about the Pay Yourself First approach is that if you find yourself needing more money through the month, you will be forced to be resourceful. It will motivate you to think up ways to make more money and even help you see ways you are wasting money. It may motivate you to work harder at your job and perhaps get a raise. It may motivate you to get a second job or even come up with a new business idea.
It will also help you identify places you are wasting money. You will naturally become more frugal and start making better choices. You will start to cut things you don’t need. For example, when I switched to this mindset, I really looked at my expenses and realized I was paying over $150 a month for satellite television. I had hundreds of channels that I never even watched. And since I was working so many hours, I did not watch much television any way. What a waste. I cut that expense back big time!!!
What I am trying to help you see is that when you start to change your approach to money, a funny thing happens. You start to have a money mindset, a change in the way you think, a increase in your Financial IQ. This will happen naturally and before you know it, your focus on money and what to do with it completely changes.
What Are The Pay Yourself First Buckets?
The Pay Yourself First Buckets are where you want to put your money as soon as you get your paycheck. Take a percentage of your paycheck, divide it equally into thirds, and put it in the following buckets:
- The Charity Bucket
- The Savings Bucket
- The Investments Bucket
These three buckets are how you start your new life. You can probably figure out, by their names, what these buckets are, but we will dive into them more. We will talk about each of these buckets over the next three weeks on MoneyMonday. We will look at each bucket in depth and talk about what they are, why put money in them, and some real life options for where exactly to put your money.
Pay Yourself First has completely changed my life, and not just my financial life. It has made me more resourceful, more financially sound, and more frugal. I don’t waste money on things I don’t really need or enjoy, just to have them. My whole mindset has changed as well. This one simple approach to managing money can completely change your life too.
You just have to commit to taking money from each paycheck and putting it in these buckets before you do anything else with it. You do have to figure out how much you make a month and how much your expenses are. If you can find some ways to cut expenses, that is great too. Once you know the percentage of your money you can Pay Yourself First with, you can get started. If you can automate the deposits, even better. When the money moves automatically, you never really see it and don’t really know what you are missing.
Make sure you check in over the next three MoneyMondays to learn more about these buckets and how you can start to build your financial future.