Want to be Rich? Pay Yourself First

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Day dreaming about getting rich is just not going to make you a millionaire. There is a good lot of hard work to do. Remember that nothing comes for free in this world. Same is the case for your millions. You actually got to strive for it. For that, you need discipline, perseverance, and the knowledge of one basic investment mantra: Pay yourself first.

Investing by Paying-Yourself-First Rule

You pay your utility companies for electricity and water, your grocer for the food, your family for their love and your friends for taking you along for a party. So, where is that ‘You’ in all these payments?

Paying yourself actually means investing a part of your income. You can deposit this amount in stocks or mutual funds or any other investment avenue that will guarantee you a good return. So, before paying everyone else why don’t you pay yourself first and then you can forget about it for the rest of the month.

What many of us do is exactly the opposite. We wait till all other payments are paid and invest the remaining meager amount. Usually, at the end of the month we end up with an empty wallet and broken dreams. Consequently, we are not able to invest a significant amount.

Now, what happens if you change the pattern of your payments? Suppose you pay yourself first and all other payments later, how is it going to affect your overall investment?

This simple technique actually bolsters your investing practice as no other strategy can. By paying yourself first, you ensure to set aside a definite amount to invest in income generating sources, every month.

The Psychological Effect of Pay-Yourself-First Rule

The practice of paying yourself first actually has a psychological effect too. It wires our brain into keeping aside an amount each month to invest. This turns out into a habit that will change the way we see all our financial dealings.

When we see how our investments have grown, it gives us encouragement to make more investments. This helps us to cut down on unwanted expenses as much as possible. In other words we begin to spend more on assets and less on liabilities. Assets are those which generate an income and liabilities are those which do not. More on assets allocation is bound to increase the money flow into your hands.

Grow Money Exponentially

By paying yourself first your income actually grows exponentially like compounding. When you start investing you only put aside a small amount of your income. Over time the returns from these small investments begin to pile up. This makes it possible for you to put aside more for investments. This again increases your returns, thus setting a cycle that makes your money grow continuously.

Some Things to Do Alongside Pay Yourself First for Success

At first it might be hard to follow on with First-Pay-Yourself Rule. There are some techniques to help you stick on with it.

Automatic Transfer of Salary to Investments: Make arrangements so that the salary you get is diverted to your investments before it reaches your hand. This way you will have paid yourself before you know it. You can avoid the effort to put aside a part of your income for investments, as the bank automatically takes care of it!
Judge if Expenditure is an Asset or a Liability: Whenever you spend a significant amount of money, make a mental calculation if what you are buying is an asset or a liability. Try to focus on buying up assets and avoid liabilities. Sometimes we can change a liability into an asset. For example when you buy your car, it is a liability. But if you give that car for rent you can actually make money from it. This income must be put aside for further investment.
Try to Live Below your Means: Most rich persons are financially prudent. If you examine closely the lives of those who struggled in life to reach the position they are now, you will realize that they live below their means. They don’t spend on unnecessary things and refrain from liabilities that drain out their income.

Though it sounds very simple, Pay-Yourself-First Rule is one of the basic and most important things you should do to be on that road to success. For some, paying themselves first is the hardest thing to do. However, just imagine how miserable life would be in the long run when you dry out whatever savings you had and no investments to draw income.

If you can visualize a life without any financial back-up, then it is pretty sure that you have already made the decision to pay yourself first.

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