One of the best financial tips I every got was, “It’s not how much you make, but rather how much you keep.” Paying yourself before you pay others, including bills, is the easiest way to accumulate wealth. What do I mean by paying yourself first? Before my bills, are you crazy? Keep reading and you see how to make your wealth grow before you allow others to get their wealth.
How Do You Pay Yourself First?
Easy, when you get paid take a portion of that money and set it aside in one of the following accounts:
401K
The easiest way to pay yourself first is to setup a 401k and have automatic weekly or bi-weekly contributions. You also get the added benefit of lowering your taxable income. Talk to your employer’s finance or payroll office to set up your 401K.
IRA
If you don’t have access to a 401k, then you need to setup an Individual Retirement Account. You have two options: Roth or Traditional (please read the advantages of both before selecting one over the other). Fidelity has a tool that can help you in your decision process. Make monthly deposits or a yearly contribution as you wish. A great way to fund this account is to take your tax refund and deposit it immediately.
High Yield Savings Accounts
Make sure you have an emergency fund available. A high yield savings account, like Emigrant Direct, is a great place to stash for any unforeseen emergencies. Ideally, you should have about 12 months worth of income put away for hard times. Make monthly deposits to your emergency fund until you get 12 months of income. Your emergency fund should have priority. Get more information on high yield savings accounts.
Investment/Brokerage Accounts
These are a little more risky than the other accounts, especially if you manage them yourself, but can also produce significantly higher returns. For most investors I would recommend the use of ETFs until you have some experience.
The IRA and 401k have bonuses: If you, for some reason, have to file bankruptcy these accounts are protected. A 401k also lowers your taxable income, saving you from paying more in taxes. A Traditional IRA can also, but has limitations. I would recommend anyone eligible for a Roth IRA. Get one.
Pay yourself first and survive on what you have left over. How much you pay yourself depends on you but I would recommend at least 10% of your pay. Make it a goal to pay yourself a little more each year. If you get a raise, automatically deposit the amount of the raise into one of the above accounts. These accounts are the foundation for building wealth and paying yourself before others will insure that you’re building your wealth before building others.
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