I recently came across and decided to buy David Chilton’s book “The Wealthy Barber Returns”. If you haven’t heard of Chilton before, his original book “The Wealthy Barber” was a huge success in Canada selling over 2 million copies. His principle message at the time was that everyone should be saving at least 10 to 15 percent of their income for retirement. In his latest book Chilton expands on this idea while re-introducing a few practices like the often heard habit of “paying yourself first” — which is what I’ve chosen to discuss here.
The idea of “paying yourself first” may sound strange at first, but it’s actually pretty clever. In essence what it means is that you put aside some money (usually into a savings account) every time you get paid — the difference being that you do this before you spend your money on anything else (including bills). This automatic withdrawal can be a fixed amount or a percentage of every dollar that you make. It doesn’t matter. The point is that you’re saving money before you spend it elsewhere. Doing this guarantees that you’re saving at least some of your money for the future.
Of course paying yourself first will likely mean that you’ll have to rethink your budget a bit (that is, if you’ve got one). Since you’re putting a set amount of your earnings aside before you even get a chance to spend it, it logically follows that you’ll have less money to spend on everything else that usually eats up your pay. Worst case scenario is that you’ll find yourself accumulating even more debt. Thankfully, avoiding this trap is fairly easy to do.
The first trick is to start off small — the reason being obvious: it’s easier to manage a 5% than a 40% reduction to one’s budget. Another trick is to simplify the process by asking your bank to make these “self-payments” automatic. In my experience, doing this takes away any temptations to cheat. It also adjusts your chequing account’s balance to accurately reflect just how much is available for you to spend. Knowing you only have x-amount to spend can go a long way to prevent you from overspending. Of course if you’re already overspending, that’s an entirely different problem!
Personally, I’ve been “paying myself first” for just over six months, and while I was skeptical at first, it has actually worked for me. I started small by opening a no fee/”high” interest savings account that automatically pulls $100 from my chequing account whenever I get my pay. My intent was (and still is) to use this money as a rainy-day fund. After a couple of months I expanded and opened two more accounts: one for car emergencies ($50/pay) and another for pet emergencies ($25/pay). Since I usually get 2 pays per month, this means I’m atomically saving $350 per month, which is about 12% of my monthly income — right in the middle of Chilton’s suggested 10-15 percent.
Initially my biggest fear was that I wouldn’t have the discipline to see the money as being “out of bounds”. To my surprise this hasn’t been the case at all — in fact, I rarely realize the money is even there. The accounts just keep growing and growing, and for some reason I just can’t bring myself to spend the money that’s in them. So strong is the psychological effect, I wonder if I’ll be able to use the funds if and when that rainy day comes. In some ways, the money no longer feels like it’s mine.
Of course, having three rainy day funds (one for myself, one for my car, and one for my cat) isn’t exactly what I would call a sound investment plan — especially since “high interest” in this case means somewhere between 1 and 2 percent. At this rate, I’m losing money since it doesn’t even cover inflation! On the flip side, I don’t want to introduce too much risk because I can’t predict when I’ll need the money — making stocks and even GICs non-options. That being said, I’ve promised myself to stop putting money into these accounts once they reach a certain threshold. For the personal emergency account this probably means having enough money saved to cover at least three months of expenses. Once these thresholds have been met, I’ll start putting the money elsewhere.
If you’re interested in trying this idea out for yourself, but don’t know where to start, try talking about it with your bank. They’ll walk you through the steps and have you going in no time. If not there’s a lot of information on the net as well. Typing “pay yourself first” on Google will literally give you hundreds of links to choose from.