Take any financial planning book in a bookstore and you’ll see the same advice. If you want to accumulate enough money to retire someday, begin by budgeting.
By listing expenses and limiting spending, they argue, you can have enough left over every month to save and grow rich.
The problem is that when you budget, you pay everyone else first — the landlord, the credit card companies, the phone company, and so on. And, despite your best efforts, you end up with next to nothing to put in the bank.
So you chastise yourself and promise to do better next month. But you never do.
There are always unexpected bills to pay, unanticipated sales to take advantage of, and that impossible-to-figure-out $200 or $300 that seems to fall through the cracks.
I tried budgeting for about 20 years. It just didn’t work. But there is a strategy I discovered later on that does work. In fact, it works very well.
And I think the reason it works so well is because it is so damn simple.
Here it is: Every time you get paid or make a profit or come into money from any source, put a fixed percentage of it into a savings account right away. Put that money away before you pay any of your bills.
Think of yourself as a corporation. As CEO of that corporation, your job is to make a healthy profit. The money you put into this special account is your profit. Everything you spend after that — on bills and so forth — are your expenses.
Only the portion that goes into the savings account is really yours.
You might say, “This is nothing but a way to fool myself. If I have discipline, I can put the same amount of money into that account after I’ve paid my bills.” You might even think doing that is more responsible.
But it’s not. Your first responsibility as an individual (and as CEO of YOU Incorporated) is to become financially independent. By doing so, you will never be dependant on other people or the government. You will be able to take care of your needs and the needs of your family. That is a very responsible goal. And it’s one that you will be able to achieve easily if you pay yourself first!
To make the process somewhat automatic, have a portion of your paycheck electronically deposited into your account each month. You could argue that this is actually paying yourself second. The government always gets first dibs on your paycheck. But you can beat the withholding tax racket by setting up a tax-deferred retirement account — an IRA, SEP, 401(k), or 403(b).
I pay myself first by depositing a percentage of any income I receive into a savings account. Then I put as much money as I’m allowed into a tax-deferred vehicle.
I pay the government next by creating a separate holding account into which I deposit a percentage of every fee that’s paid to me — the money I’m going to owe in taxes.
Then I pay my bills.
If you are not doing this now, try it. You’ll be amazed at how fast your personal profit account grows.
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