Tuesday, November 6, 2007

3 Investment Principles Every Young Person Should Know: #2 Pay Yourself First

If you want to create wealth you must either save more or spend less...that's it. Why is it so hard then? Most people have the best intentions when it comes to doing these things, but at the end of the month, when the bills and statements arrive, the letdown begins. You realize that your money has yet again pulled a Houdini and is no where to be found...where did it go...you stand there puzzled, your empty Starbucks cups and Hollywood Video receipts mock your weakness. And so the cycle goes...unless you make a change. Thus, the second of the three investment principles every young person should know:

#2: Pay Yourself First

Most people pay everyone else before they pay themselves. They hope at the end of the month they will have some money left over to put towards savings or investments, but it rarely happens, its too easy to spend money. Paying yourself first means exactly that: when you get your paycheck, before you start paying bills, going grocery shopping, filling your gas tank, etc....take a percentage and put it in savings or investments. If you do this you will never go a month without saving money. At the end of the month you will still probably spend all your money...its what we are all great at, but the savings will already be in the bank, safe and sound.

The easiest way to pay yourself first is to set up automatic fund transfers on the days you receive your paychecks. This way you won't even realize the money is gone, you'll budget and spend according to the new amount. Spending is largely psychological, if you start out with a smaller amount your mind will tell you that you have to spend less, be more frugal.

Finally, an example of the power of paying yourself first from financial educator David Bach, author of "The Automatic Millionaire":

"Let's assume you make $50,000 a year. That's about $2,000 every two weeks, which is how most people are paid. So to save 10 percent of your income, which is less than an hour a day of savings, you'd have to save $200 every two weeks -- or $14 a day.

If you invested $200 every two weeks for 35 years in a retirement account that earned an annual return of 10 percent what would you have? Quite a pot of gold: $1,678,293.78."

**Author's Note: I actually pay myself second, I give the first 10% of my income to my local church, also known as tithing...but the principle remains the same.

Digg this