Do you want to be rich someday? You need to pay yourself first. That means that you invest* your money automatically every single paycheck from the point you hear this until you stop working for a paycheck (at which point you should be rich or disabled). *Alternatively you can pay down debt.
This is great advice, but I want to take it a step further. If you want to achieve your financial goals faster, you need to pay yourself last too.
Excess cash- not just for Rich Kids of Instagram
If you pay yourself first, but you don't pay yourself last, you will theoretically end up with a swimming pool of Benjamins that are just begging to be spent, but most likely you'll piss it away.. You think I'm kidding, but excess cash isn't just a problem for the Rich Kids of Instagram. Let me explain.
Every month my husband and I each earn some money, but we don't see all that money.
I automatically deposit 23% of my check into a 401K, and I contribute $150 to my HSA. This is money that I don't plan to touch anytime soon. Since my husband is a student we see all his check (except the Federal/State withholding). We have an auto draft on our checking account that moves 25% of his check to an after tax account (since we've maxed the Roth IRAs) for the year. That's paying ourselves first. It makes sure we don't neglect our future selves who are a bunch of lazy bums who hate working to earn money and prefer for our little green slaves do that for us.
Doing this, we automatically invest 25% of our salaries. After we've invested this money, what are we left with? A big ass pile of cash.
We also add our rental income to the pile (after expenses including expected taxes).
So now we've got a huge ass pile of cheddar, so what do we do? Make it rain?
No, we budget.
Creating our maximum spend budget
Our budget looks something like this:
Big Ass pile of Cash - Giving - Tools - Target Savings (future tools or luxury spending) - Investments - Luxury spending = $00.00
We call this tools, opportunity and luxury spending for rich people.
When my husband first became a student, and I wasn't bringing home the big bucks yet, our budget looked like this:
Smaller pile of cash - Lesser Giving - Tools - Smaller targeted savings - Tiny bit of investing - A very few luxuries = $00.00
We called that tools, opportunities and luxury spending for slightly less rich people.
Because we use a zero sum budget, our pile of cash is supposed to get "used up" one way or the other. It needs to be accounted for.
From the time the budget gets created until the end of the month, life happens. I spend some money on groceries, but it will definitely be less than $525 (or whatever we budget). We usually only buy one tank of gas, but we always budget for two. Our utilities might be $14.76 less than we expected. Since a budget is a maximum, not an average, we should ALWAYS, ALWAYS, ALWAYS have money left at the end of the month.
Our budget represents maximums rather than aspirations because that's how we roll. Since I'm budgeting for a maximum, I just have to keep careful track towards the end of the month to not overspend. Sometimes this is easy, but this month it is requiring a bit of will power because I overspent earlier.
So what am I going to do with all the money that I didn't spend? Well, I have to remember that some of my money still has a job to do. For example, targeted savings and investments are "opportunities", so we account for every dollar of that money either by using it (cashing in on an opportunity, such as the opportunity to pay for new brake pads on our car) or by banking it (saving/investing for future opportunities). I make this easy by divorcing the money from my checking account. I've got about 8 Capital One 360 accounts as well as an after tax brokerage account at Vanguard that help me out with these things. When we want to cash in on the opportunity, we transfer it back to checking. Easy peasy.
On the other hand, not all the money still has a job. Where did all this money come from? It's the money we thought we might spend on tools and luxuries, but we didn't.
We might have thought that we would spend $2700 on tools, and $300 on luxuries but it turns out that we spend $100 less than expected on groceries, and we cancel our camping trip saving us $242 on luxuries, and our babysitter cancels on us two days this month saving us $150.
In this scenario, Out of our budgeted $3000 we've only spent $2508 What are we going to do with that extra $492?
Make it rain? No.
We pay ourselves last. And paying ourselves last is way more fun than paying ourselves first because we are paying our current selves or our future selves, depending on what we want!
Paying yourself last rocks!
When you're working in the "budgeting" time period, there will inevitably be many conflicting goals. I want to pay some money to eat healthy foods and pay for daycare, but I also want to set aside money for car repairs, and I want to spend money on my upcoming vacation, and I want to put aside money for a future rental property. The budget, gives every single dollar a name and a job. It shows me my priorities given the constraints of my income. My budget allows me to pursue many goals all at once.
The money leftover at the end of the month (that is not in targeted savings or in an opportunity fund) has no constraints! My life, my needs and my wants are in the past, but the money is still here in the present. The leftover money is free! I can use it how I please without regard to my conflicting goals. I have a whole new pile of money for that business. This money exists to pay me.
Now here's the thing. If I don't pay myself last, how much of that $492 will I spend next month, and what will I spend it on? I'll probably about $497 of it on some unimportant thing or bad investment. I'll actually spend more than I have because I will mentally account for a big extra pile of Benjamins that I know have no job but to make me happy.
That's why I have to pay myself last. Whatever money is left at the end of the month has to go to my top priority, or I'll piss it away.
Usually, we sweep this money into our after tax brokerage, but we don't have to. We could buy tickets to a concert, or we could top off our home renovation fund. We could give more generously to causes we believe in, or we could put the money into an emergency fund. Whatever your top priority is, that's where the money should go.
That's what it means to pay yourself last, and I highly recommend that you do start implementing the practice immediately (May 31st can be your first "last" pay day.
I'm a wife, a mom, an employee, and a personal finance nerd who is devoted to spreadsheeting my way through life.