Everyone wants to build wealth right now, this second, as quickly as possible. If you make six figures a year (or if you’re dishonest—think Madoff), maybe it’s possible. But for the rest of us peons, slow and steady wins the race. Pay yourself first, and get a jump on the rest of the tortoises out there.
This is a very simple strategy. When bill paying time comes around every month, most people pay their rent, the credit card, the utilities, the cell phone, and everything else under the sun first. Then MAYBE they take what’s left and save or invest it. Pay-yourself-firsters do the exact opposite. They pick a set amount, or a percentage of their income, and put it into their own pocket before they pay all those creditors knocking on the door. They use the remaining money to pay the bills.
This can take some trial and error. The idea is to find an amount that will show you results as far as your financial goals are concerned, but not so much that you won’t have enough left to pay everyone else you owe money to. The best way to make this process painless is to start with a small amount, let’s say 1% of your take-home pay, and put it into a separate account. This can be a savings account, investment, IRA, or anything else that strikes you. In a few weeks, increase your pay yourself first amount to 2%, or 4%. Keep going until you find a number you’re comfortable with. If you increase the amount you pay yourself first gradually, chances are you won’t even notice the difference. I started paying myself first about 2 years ago. In that time I have set up an emergency fund of about 6 months’ worth of expenses, and I’m starting to fund my 2009 IRA. Next on my agenda: a new computer.
For a bonus point: pay yourself first via automatic withdrawals. Link your checking account to a savings or investment account and set weekly, bi-weekly, or bi-monthly automatic withdrawals from the checking account. It’s usually best to set these to debit automatically a day or two after you get paid.