Pay Yourself First
I am embarrassed to say that I learned this lesson only in the last couple of years. If I had learned this lesson when I was 20, my wealth would be more than a million dollars greater than it is today.
Most of us have been socialized and modeled financial behavior that does not lead to wealth creation. The typical pattern is this:
Receive Money
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Pay living expenses
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See what is left over
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Spend what is left over
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Perhaps put a tiny amount aside for retirement
Let’s stop and think about how well this model works. When you look around at people who are 40 years old and older, do you see many people getting a lot wealthier, having more time, having less financial stress, and some deciding to stop working because their passive income is so high? No! You usually see the opposite.
But there are a small percentage of people who have deliberately rejected the common model and have done something radical:
The paid themselves first.
Okay, so what does this mean?
It simply means that their model works like this:
Receive Money
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Take a large percentage of that money and invest it, and never use the money for anything else
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See what is left over
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Spend what is left over on living expenses
If you apply this model to your life, in 20 years you will be wealthier than 99% of all the people you know.
How do I know? Because this is how billionaires like Warren Buffett, J Paul Getty and Sir John Templeton became billionaires.
As I said earlier, Sir John Templeton’s investment percentage was 50% even when he was just starting out and was broke. 50% is a huge percentage (work out half of your salary/wages and imagine investing that amount every week). But if you are determined you can do it.
Let’s be more conservative and say you put aside and invest 25% of your income.
Simple Example
After tax income $52,000 per year = $1,000 per week 25% of $1,000 = $250 per week – you invest this amount.
Working with a 6% annual return after inflation, at the end of 20 years your investment is worth: $506,905 (inflation adjusted)
At the end of 30 years your investment is worth: $1,089,421 (inflation adjusted)
And this is without increasing your weekly amount of $250. So the figures above are conservative because as your salary increases, your investment amount increases. You would also add 25% of any windfalls such as an inheritance.
So look around at people who have been earning for 30 years. How many of them have over $1,000,000 in investments (excluding their family home)?
Imagine if they did have $1m in investments earning 6% per year. That would be $60,000 every year in passive income.
What kind of Lifestyle could you live if you had $60,000 passive income coming in every year?
That person can and must be you. No matter how old you are, start this week. But you will have to have a mind shift and you will have to change your model. You will most likely have to start living on less than you are used to, right now. You might have to downsize your life for a while. But the benefit will be HUGE. From now on, live a new more powerful, more wealthy way:
Pay yourself FIRST!