One of the oldest ways to save money and build wealth is to build a money system and pay yourself first. We all have many financial obligations competing for our money and attention, but none of those obligations are as important as preparing for future.
It is extremely unlikely that you will win the lottery. So in the event that you do not, you need to come up with a plan that is guaranteed to work.
If you start with $100 and add $100 a month to a Total Stock Market Index Fund, after 20 years you will end up $61,000 or you will do even better if the stock market performs better.
If you pay all of your monthly bills and then spend your discretionary funds and try and save whatever is left over you will not save nearly as much as if you had paid yourself first.
Paying yourself is a change in the way that you think. You start thinking of yourself as a business. Publicly listed companies must report audited earning statements to the public every 90 days. Are you preparing your personal financial statements every 90 days?
How much income are you bringing in? How much is going out? How are you going to increase the amount of money coming in and reduce the amount that it takes to run your household?
It all starts with a plan.
Paying yourself first does not happen by accident. You have to build your money system.
These are the 5 steps to go through in order to build your money system:
- Create your financial goals – FU money
How much money do need to become financially independent?
Creating a concrete number that you want to reach will allow you to map out a long term plan to get there. That number will motivate you. And this number becomes really important later on in the process.
Be realistic. I want to have $10million in my bank account, but it is unlikely that is going to happen anytime soon. How much money do you need to cover your yearly expenses? Times that number by 25 to figure out your FI number.
The lower your annual expenses the less money you need to reach FU money.
- Set up your financial accounts
It starts with your checking account.
Then you get to decide what other accounts are important to you? Savings, Health, Stocks, Retirement.
Set up all of the accounts that you want to fund. Retirement accounts like a 401k and IRA are important to create because they have special tax advantages.
- Build your money system
Connect your checking account to the investment accounts. Make sure you know all of the login details and can easily access each account you have set up.
You will want to check your money once a quarter or every six month to make sure that the system is still setup. There have been a few times where I have checked my system and found out that the connection to my bank was broken and money was going to where it needed to.
- Choose your investments and automate the process
This is the fun part. Choose your investments based on the financial goals you created in step 1.
Are you going to be more aggressive or conservative? Do you want to build a large amount of wealth or would you rather have less wealth, but safety knowing that you money is protected from a downturn?
Your investments: stocks, bonds, interest, index funds, real estate; these are the things that are going to be the rocket fuel toward your financial goals.
Once you have chosen your investments make sure that money is automatically invested into these vehicles when the money enters the account. The last thing you want is for money to stack up in these accounts and not be working for you.
- Earn income
None of this system works without funding. It is your job to continuously put money into this system. This means earning income through a job or starting a business.
Over time your goal should be to increase the amount of money you put into this system. Gain more skills, become more valuable and negotiate pay increases.
Following these 5 steps will help fund your emergency account and build investment wealth.
The less you think about and mess with this system, the more successful it will be. The point of paying yourself first is to make sure this money is compounding for your future. The more you touch this system the more likely you are to change it or withdraw money for some other purpose.
It only works if you let it work.
The earlier you start to pay yourself first the faster you will reach financial independence.