What is the single most effective piece of financial advice you’ve ever received?

These three words make up the single most effective piece of financial advice I’ve ever received:

Pay yourself first.

I first came across these words when I read David Bach’s book, The Automatic Millionaire at age 19.

First, I’ll describe how to NOT pay yourself first, which is what a lot of people do:

You bring money in (paycheck) and then you pay money out (mortgage, bills, food, other expenses). If there’s money left over, you then have the option to put money away for your future (pay yourself last).

The problem with this approach is that there’s no guarantee you will have money leftover to pay yourself. What if an unexpected expense comes up or you decide to buy some new sneakers? All of a sudden, you’ve spent your entire paycheck.

You tell yourself, “Oh well, maybe I’ll save next month.”

But it rarely happens because 1) unexpected expenses always arise and 2) you have to rely on willpower, which is never a good way to make sure things happen.

This is why nearly half of American families have no retirement account savings [1].

What does “pay yourself first” mean?

It means to save, or put money away for your future self (pay yourself), BEFORE you pay for everything else. This is a way of protecting the money from yourself because it is gone before you have the opportunity to spend it.

How do you pay yourself first?

You pay yourself first by setting up a recurring automatic contribution into a retirement account such as a 401(k) or IRA from each paycheck. The key is to make it automatic, like David Bach suggests in his book.

I started doing this when I started my first real job out of college and never looked back.

I paid myself 10% of my paycheck in year one. I never “missed” this 10% because I felt like I never had it. Each time I got a pay raise, I increased this percentage by 1% and prioritized paying myself more over upgrading my lifestyle. I did this until I was maxing out my 401(k).

Now, ten years into my career, I’ve accumulated nearly a quarter million dollars in my retirement savings account. Even if I stop contributing now, there’s still a good chance I’ll have well over $1 million in 20 years.

It’s worth noting that I’m fortunate to have never had any student loan debt and I also have a well-paying job. But more than anything else, I attribute my current level of savings to the fact that I started paying myself first early on and never stopped.

This simple piece of financial advice, these three words, truly changed my life.


[1] Here’s how much the average American family has saved for retirement

Featured image by Michal Jarmoluk.

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