What is the most important money mindset that differentiates people with financial abundance from those without? Financially successful people know this principle: pay yourself first.
Understanding this Money Mindset of personal finance and financial achievement provides us the building block for all future financial successes.
What does Pay yourself first mean?
"Pay yourself first." Put simply, it means that every dollar you earn, you put some aside for your future before you pay anyone else. This philosophy of money ensures that you will always have the means to take care of yourself and what is important to you without relying solely on your paycheck. If you pay yourself enough first, you will even achieve financial abundance, the monetary means to pursue whatever passions you have.
Why does this Money Mindset matter?
With all the demands on our wallets in our hectic lives, it is only too easy to fall into a reactive mindset, burdened with excuses for why you can’t save enough.
The tax man takes too much. Rent is too high. My mortgage costs too much. Have you seen the price of food? Don’t even get me started on the cost of gasoline!
Internalizing these devastating excuses will leave you at the end of each month with hardly a scrap to put towards your future. And while there are other money mindsets that have developed in response to these excuses, you’ll always be trying to play catch up at the cost of your happiness. With millions of people in North America alone living paycheck to paycheck, trying to save for our future after we’ve spent our earnings seems futile. Not paying ourselves first leads to a vicious cycle of pinching pennies on our morning coffee, buying the cheaper ingredients, wearing our shoes down until we have holes in the soles, and holes in our souls.
How do we apply this Money Mindset?
Changing how we view money is hard, but there is a silver lining. While this Money Mindset of paying ourselves first is the most important, it is also the easiest to implement. Many employers are able to split our paycheck and send funds into an investment account before we even receive our monies. Holding back a portion of our earnings, and investing them before they even touch our bank account is the embodiment of the principle; Pay yourself first. If the source of our pay isn’t as regular, or the option to divert your earnings into a separate account isn’t available, we can set up our own system to pay ourselves first. With the advent of electronic banking, it is relatively simple to set up multiple accounts, and have automatic transfers regularly scheduled. All this can be accomplished within 30 minutes, and possibly even as quickly as 5 minutes.
What if you are a freelancer and don’t have regular paychecks? While more manual, you still need to pay yourself first. While you are putting aside money for taxes (I hope you’re at least doing that!), send some extra dollars into your investment accounts for the future. This way, whatever is left is what you have for living and spending.
How much should you save?
As with all other savings, the more you put away now, the faster you’ll reach financial freedom. George S. Clason suggests in The Richest Man in Babylon that 10% is a good number. Although that depends greatly on age, current savings, planned uses of the money, etc. Economists trying to give a single number for everyone range from the 10% number to 20%, or even higher. But before you get overwhelmed by the magnitude of that ask, just put aside a dollar. Then another dollar. Then another.
We don’t need to change our thinking right away, the right system takes care of our financial future for us. But before long, as you start to realize the financial goals you have are attainable, you’ll certainly appreciate, and maybe even advocate, this essential Money Mindset. Adopting the Money Mindset of Paying yourself first will ensure that you are taking care of your future self as well as your today’s self. And that simple action starts your journey towards financial freedom.