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Does “Pay Yourself First” Really Work?

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Forge Your Wealth is meant for education and entertainment and should not be used for financial advice.

If you have read the book: “The Richest Man In Babylon,” you have probably read the part where the advice “pay yourself first” is brought up. In fact, you have probably heard this concept without reading the book. The concept is to save or invest before paying anyone else. It has practically become the battle cry for all financial advisers. However, this concept receives criticisms in many forums. I have heard people say that the concept is unrealistic in many situations like where you have massive medical bills or need to provide for your children. In this post, I will analyze the concept of “pay yourself first.”

We Killed “Pay Yourself First”

When you receive your paycheck you just receive your wage as it says in your contract right? That’s weird, because I could swear my paycheck was a few hundred short of what I should have earned from my wages. If you are like me, your income is withheld to pay taxes. Technically speaking, no one who does this is “paying themselves first,” you are paying the government first. There are very few exceptions to this rule. You may not have signed up for this, but unless we do something, withholding taxes from income will be here to stay.

Who Do You Pay Second?

So you may not be able to pay yourself first, tough, the government is not taking all of your money. Who do you pay second? Most people would say that it depends on whether they need to pay rent, gas, food, etc, but that is not always the case. For instance, do you have a 401k, investment portfolio, or at least a savings account you set up automatic deposits for? If you did, that is who you pay second, yourself.

That is money that is at the very least not easily accessible for the third person you should pay. I will go into who the third person you should pay later.

Is It Too Hard To Pay Yourself?

It is incredibly hard to pay yourself second. Everyone has bills they must pay and responsibilities right in front of them. Sometimes dealing with the difficulties right in front of you forces you to forget what is further away. That is called tunnel vision. Ask a soldier what is more important, focusing on your closest threat to security, or the greatest. They will tell you to focus on the greatest threat first and then deal with the closest threat after. It takes extensive training to do this.

The equivalence of this in the financial world is to focus on what you need to pay for in the moment instead of saving and investing. Take this for instance, one of the greatest threats to your financial security is the lack of a retirement plan. Yet, many lack a retirement plan. While the SECURE act may improve the number of people with potential retirement plans, fact of the matter is there have always been opportunities for individuals to save for retirement. In fact, I would argue that even without the SECURE act, retirement plans are more available now than the ever have been. Seriously, when experts say that my generation is the first generation to have things worse off than previous generations I have to ask, “did those experts factor in the Roth IRA?”

Whether you have a 401k plan or automatic deposit set on your retirement savings, you are paying yourself second. That is much like a secondary payment towards social security that is likely to be around when you retire.

How To Deal With The Third People You Have To Compensate

The third person you have to pay are who ever gives you your bills. This includes your housing, insurance, debt, food, and utilities. Some people feel like these bills are too high to try to pay themselves second. That is understandable. But it is also the easy solution, which is rarely the right solution.

There are many other ways to make sure you can pay yourself second instead of never (let’s face it, you will never pay yourself third). Instead of never paying yourself, you should find ways to lower your bills, or to increase your income. Is it uncomfortable? No, it is painful.

Truth is, to become stronger at any aspect in life you must put yourself through pain. When you learn, you must actually pay attention. Studies show that the best way to learn is to try to solve the problem first and then learn how to solve the problem later, that is mentally painful. If you want to become physically stronger, you must tear your muscles apart to have them grow. No pain, no gain.

Final Thoughts

Technically speaking, paying yourself first does not exist anymore, but not for the reasons you would think. Unfortunately, the modern world requires almost everyone to pay taxes, sorry you have to pay the government first. However, you must pay yourself second if you plan to secure your financial future. Even in situations where it seems like you cannot do so, you must. Putting anything but your best effort in to forge your wealth will lead to a life of lower quality than you desire. The world is crazy and paying yourself first may seem impossible. Much like forging metal, nothing but the hottest flames will strengthen you.

Author: Papa Foxtrot

Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.

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