Pay Yourself First.
Posted: January 2nd, 2008 | Author: Joe | Filed under: Saving | No Comments »
“Into your purse will flow a stream of gold that no man can lay claim to. Thy purse will start to fatten at once and its weight will feel good in thy hand and satisfy thy soul.”
-Arkad, the Richest Man in Babylon.
Start Thy Purse to Fattening.
Translation: Pay yourself first – at least 10% of all you earn.
You won’t even miss the 10%. That’s because our expenses often swell to fit our income (and then some).This is the 1st of the 7 cures for a lean purse as detailed in George S. Clason’s The Richest Man in Babylon.
“Into the purse of each of you flows a stream of coins, large or small, according to his ability.”
It doesn’t matter if your income is large or small. You can even start with 1% and work up to 10%, perhaps 1% every 6 months or 3 months. Once you set aside 10%, you will get used to living on only 90% of your income (living below your means) all the while building savings. A common mistake a lot of people make is to think that they don’t earn enough to make that 10% matter. But it isn’t so much about the dollar amount as it is about the time. 10% of a small income will become a large value given enough time. Of course a larger income means your savings will add up faster – the same goes for a larger percentage. It’s simple, but it works.
It’s difficult because it takes discipline.
But it’s also easy because it becomes an automatic process after the initial setup. Trust me, you’ll be amazed how quickly you adapt to not even having that 10% to spend. You may even find that, after the initial 10%, you can go as much as 15-20% and not notice. In fact, many financial experts recommend this strategy for IRA and 401k contributions.
One method is to take your raise each year and increase your contribution rate by that percentage. For example, if you’re currently putting away 10% and you get a 3% raise, you can increase your rate to 13% without noticing it. This is the basis of The Automatic Millionaire. So you have to ask yourself a simple question:
Where will you be in a year?
Let’s suppose you do nothing regarding your savings. In a year from now, you will likely be in the same financial status you are today. Only a year older. Now let’s suppose you start paying yourself first. You decide that 10% of all you earn is yours to keep. Not a radical idea. In a year, you’ll have 1 tenth of your income more than you would otherwise. And if you use online savings like an ING Orange Savings and set up an automatic EFT (electronics fund transfer), then you’ll essentially be doing nothing after the initial setup. It takes no time!
So, what do you do with this stream of coins flowing into your purse? Your first priority should be an emergency savings account. Once you have reached your goal amount (in cash, not percentage) you might want to look into a CD (certificate of deposit), but a good place to stow it while it builds is in an ING or an HSBC Direct account. These are high interest savings accounts, not money market accounts, and as such are FDIC insured up to $100,000. It’s as safe as you can get folks.
