The Best Personal Finance Tip I Ever Got

The best personal finance tip I ever got was responsible for creating a big part of my wealth. This tip should be part of your personal finance plan if you are wondering how to build wealth.

“Gold cometh gladly and in increasing quantity to any man whosoever will put by not less than one-tenth of his earnings to create an estate for his future and that of his family”

- The Richest Man in Babylon by George S. Clason.

There are several personal finance tips that are so basic and universal that they really are principles of a personal finance plan. Other tips I considered were:

  • Spend less than you make/Live within your means/Live under your means
  • Get out of and stay out of debt
  • Save at least 10% of everything you make
  • Manage your money
  • Live frugally (not the same as cheap)/Don’t try to keep up with the “Jones”
  • Make your money work for you – Invest

But if I have to choose the one that has had the biggest impact on my own net worth it would have to be: PAY YOURSELF FIRST.

This basically means that when you receive any income the first thing you are going to do is take a piece of that and save it and/or invest it (preferably invest it). Now; to most people this means to take money from your paycheck/salary and pay yourself first. But it should include any income you receive: your tax refund, proceeds from the weekend garage sale, stuff you sold on eBay, part-time work, refund from your home mortgage escrow account, cash back from credit card rewards programs, and so on.

By paying yourself first there are no excuses that there was no money left to save/invest, that you don’t make enough money or that you had unexpected expenses and could not put money away. You can also see how paying yourself first will also lead to the other personal finance tips I mentioned above. It will lead to spending less than you make if you do it along with a budget.

Compound Interest:If you invest $100 at 10 percent interest,you will earn $10 interest in a year and have $110 at year-end. If you take the $10 in interest out of the account and leave the $100 invested, you will earn another $10 the next year. If you take that interest, you’ll earn another $10 in the third year, or a total of $30 over the three years.On the other hand, if you keep the interest invested, you will earn $10 the first year on $100, $11 the second year on the $110 and $12.10 the third year on the $121. The extra dollars come from earning interest on your interest as well as on your original investment. Compounding annually at 10 percent adds an extra $3.10 in three years—not a huge deal. But in just over seven years, your $100 investment would double, to $200. In another seven years, the $200 would double again to $400—a pretty big deal.
You can use this personal finance tip to create an emergency fund, to put money into purchasing stocks or mutual funds, saving money for a down payment on a house, for starting a business, contributing to a Roth IRA or 401k plan, etc.

When done on a regular basis, over time, paying yourself first will allow you to take advantage of both compound interest (see sidebar) and dollar cost averaging. With dollar cost averaging you take advantage of the ups and downs of the stock market by buying at the same intervals (i.e. monthly) so that you don’t have to worry about timing the market.

Pay Yourself First – Creating the Habit

I was first introduced to this concept when I was in my early twenty’s by a financial planner I consulted with back then. Since I was just starting out as young lieutenant in the Air Force I signed up to have an automatic deduction, from every paycheck, to be deposited into my IRA mutual fund. This worked out great for me because 1) I never had to write a check to deposit into my investments and, 2) the money I had left after the deduction was now all I had to cover my expenses for the month therefore forcing me to live on less than I made. This took care of my savings for the month automatically.

As time went along and I got married and also started making more money I kept this going all along, increasing the amount of deductions with every raise. At one point I set up my monthly withdrawals so they would be distributed something like this:

  • $150 into mutual fund #1 (my IRA)
  • $150 into mutual fund #2 (wife’s IRA)
  • $200 into children’s mutual funds (college savings)
  • $200 into a index mutual fund (non-IRA)

By buying at the same interval every month I did not have to worry about the share price of my investment (dollar cost averaging):

personal finance tip

Since I started early and I kept increasing the amount of contributions as my earnings increased, about six years after I first started I was now putting almost $1,000 per month into our different investments. Mainly because I had created the habit and this money that was going to our investments was basically invisible to us since we had gotten used to living on the remaining amount.

As a result of paying myself first, what started as $150 per month back in 1997 is now currently worth more than $200,000 (after the 2008 stock market meltdown).

Make it Automatic

For this personal finance tip to work it is best to make it automatic so there is no chance of you forgetting to do it, having to write the check or running out of money to invest/save. If you have an employer probably the best option is to sign up for their 401k program (if it’s a good one) and they will do this automatic deduction from your paycheck. Many employers also offer you the option of having an amount from your check deducted and deposited where you tell them to.

If they don’t or you don’t have an employer then many banks and investment firms (Vanguard, Fidelity, Merrill Lynch, etc.) give you the options of setting up an automatic draft at a set interval from your bank account to go into your chosen investment.

Paying yourself first is one personal finance tip that can be done by anybody regardless of the amount that you pay yourself. It can be as little as $50 per month but by creating the habit, increasing it as you go along and being consistent over time it will be a powerful part of your personal financial planning.

If you wonder how to build wealth this is a great first step…but you have to take it – no excuses.

Questions or feedback on Personal Finance Tip?: Contact Me directly.

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