Wednesday, August 25, 2010

A Simple Way to Build Wealth

One of my favorite personal finance principles is "Pay yourself first." By paying ourselves first, we guaranteed that we were increasing our wealth every time we received a paycheck. For us, "first" meant before we paid any other bill including our mortgage, utilities, insurance premiums and credit card balances. At the time I retired, we were saving about 20% of my salary before paying our bills and spending the rest.

I didn't always pay myself first. During my first year of working, I ran out of money three days before a monthly paycheck. Fortunately, I had no major bills due during those three days, and only had to deal with being uncomfortable with having no cash. After that, I tried to have a little leftover at the end of each month and transferred that amount to savings. When I was given a raise, I tried to live within the same budget and put the excess amount into savings. However, in the beginning, I waited until the end of the month to put unspent money into savings.

At some point, I don't remember when, we began transferring money to savings immediately after receiving my paycheck. The automation enabled by electronic banking made this easy to do. With each raise, we would increase the amount put towards savings. Eventually, we achieved saving 20% of our salary.

I attribute a lot of our financial success to principle of paying ourselves first. This strategy helped us to grow wealth, minimize debt and take an early retirement.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC


Moneymonk said...

I pay myself 30% and force myself to live off the remaining 70%

Super Saver said...

@ Moneymonk,

Congratulations! You may get to retire earlier than me:-) We reached our maximum savings rate of 20% in our forties.