Pay Yourself First!

This entry is part 3 of 8 in the series So You Want To Be A Millionaire

If you’ve read any of Robert Kiyosaki’s books, or other books on acquiring wealth, you’ve probably heard this phrase before. There’s one guy, who when first encountered it, used to wonder how practical this was. That’s because he did not understand the meaning. He would reason that if he paid himself first, then tried to take care of the bills, then there might not be enough. Or, he would have to pay himself only what he knows he would have remaining after all expenses got taken care of, and in which case, it wouldn’t matter whether he paid himself, or the bills first.

Well this guy just did not understand what this strategy was about. You need to pay your bills. This is not about advocating keeping a nice chunk of change while you neglect your bills. You could get in trouble quickly doing that. The concept that is being promoted here, is taking out as much as you can legally, from your gross income for your personal benefit, without incurring tax on said sum. In other words, reducing your taxable income without diminishing the gross value.

For example, if you made $100, and you had to pay 40% tax, you would only receive $60 to do as you will.

But let us say you could take out 10% before paying tax, which you could then put towards your savings…

10% of $100 is $10.

Take that out and add to your savings

Savings: $10

Remaining amount: $90

Now the 40% tax will be applied to this balance:

40% of $90 = $36

This means after tax, you will have $54 (ie. $90-$36)

So in total, the amount that belongs to you in this scenario, is now $54 + $10=$64

If you pay the government first, you only keep $60.

But if you pay yourself first, you keep $64.

Ok, so now that we got the gist of the pay yourself first concept, what are the options available?

Well it depends on which country you live in. Most likely your country has some kind of pension scheme that allows you to pay some percentage (around 10 to 20) of your salary before tax, towards this fund. Take advantage of this. Aside from the basic fact that it will benefit you when you retire, it also allows you to save more than if you were to put aside the money after being taxed. Another plus to doing this, is that it removes the temptation to squander this portion of your savings, as it is not readily accessible to you.

(Note that your pension scheme or 401k plan, accumulates interest, which is compounded)

Action Plan

+ Find out what pension schemes are available to you
+ Determine what percentage you will contribute (strive to max it out)
+ Enroll immediately, if you are not already a participant


Related posts:

  1. Automate The Millionaire Plan
  2. Buy A Home?
  3. Build A Reserve Fund
  4. Give Back To The Community
  5. Eliminate Credit Card And Other Bad Debt

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