Category: Wealth

How to Pay Yourself First

By Ryan H. Law

Jim Rohn

Business philosopher Jim Rohn taught that, “Poor people spend their money and save what’s left, while rich people save their money then spend what’s left.”

It’s familiar advice that we’ve all heard:

Pay yourself first.

Pay yourself first is one of the most repeated phrases about personal finances. One of my favorite financial books, “The Richest Man in Babylon”, which was originally published in 1926, repeats over and over the idea that, “a part of all I earn is mine to keep.”

But how do we actually do this? Today’s post will give you a few ideas to begin to implement this.

  1. Contribute to your 401(k)If you have a 401(k) (or similar plan) available at work, this is one of the easiest ways to pay yourself first. Not only that, but in most cases this contribution will be pre-tax and will lower your tax bill.

    If you have a “match” from your employer, you aren’t just paying yourself first, you are, in many cases, at least doubling your savings. If you contribute 3% and your employer matches that, you are actually saving 6%.

  2. Contribute to a Roth IRAIf you are eligible to contribute to a Roth IRA, it can be a great investment. Many mutual fund companies, such as Vanguard, T. Rowe Price and Fidelity, will allow you to set up an automatic transfer from your paycheck or bank account. You can often start with as little as $25 a month.
  3. Have a set amount (ideally 10%) transferred out of your checking account and deposited in a savings accountIf your bank doesn’t allow this option, check with your employer. In most cases your employer will allow you to allow a certain amount, or a certain percentage, to go to different accounts. You can direct 10% to go to savings and the remaining amount to go to your primary checking account.

    If 10% is too much, start smaller. Start with 1% or ½ of 1%. See https://ryanhlaw.com/one-small-step/ for more information about starting small.

Pay Yourself First

Habits of the Wealthy

My last two posts have mainly focused on the internal world (thoughts) of the wealthy. Success, however, is a combination of our attitudes (internal) and our habits (external).

Before I go any further into today’s post, I want to clarify a few things:

  • Wealth does not (automatically) equal success. If fact, you can find story after story of wealthy people who are estranged from their families and have no real friends. However, while the media loves to focus on those types of stories, there are many stories of wealthy people who are very successful in other areas of their lives as well.
  • You may not want to be wealthy. Wealth brings additional challenges that some people may not want. The habits and attitudes defined here, however, can help in any area of your life.
  • We are not wealthy (yet). We are doing better financially than we ever have, and I am confident that these habits will only improve what we have done.
  • These posts only apply to those in a free-market economy, such as America. Being born in poverty in a third-world country brings an entirely different set of challenges. People born in poverty, however, can rise out of it using these types of habits.

If you would like to be better off in the future than you are now, however, this post, and my previous two posts, should help.

rich habitsMy post today is based on some great research that Tom Corley has done. He spent five years studying the habits of the wealthy and the poor. Tom’s family was wealthy until he was about 10, then they lost everything overnight and lived in poverty the next 11 years. Tom didn’t want to live this way – he wanted to know exactly what wealthy people did to become and stay wealthy. Here are some key findings from his five-years of research:

  1. The wealthy live within their means. They save approximately 20% of their income and spend no more than 25% on housing, 15% on food and 10% on entertainment. This reminds me of one of my favorite quotes about millionaires:

    “Millionaires become millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.” -The Millionaire Next Door

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  3. 88% of the wealthy read at least 30 minutes per day about their career, education or for self-improvement. Only 2% of the poor do this. 63% listen to audiobooks as they commute, while only 5% of the poor do this.
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  5. 67% of the wealthy watch less than an hour of TV per day. 77% of the poor watch more than an hour of TV per day. Instead of watching TV the wealthy work on hobbies, or side businesses, or they volunteer and network.
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  7. And speaking of volunteering… 3/4 of wealthy people volunteer with an organization or cause they believe in at least 5 hours a month, while only 10% of the poor do this. Volunteering is a great way to network as well.
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  9. 62% of the wealthy are focused on at least one major goal every day. Only 6% of the poor do this.
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  11. The wealthy wake up early – 44% get up three hours before their work day begins. 3% of the poor do this.
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  13. 81% of the wealthy make and prioritize a to-do list the night before, while only 19% of poor people do. In addition, they focus on the tasks – they complete, on average, 70% of their list.

There are other habits as well, but these seven are a good starting place. If you were to pick one or two of these to begin focusing on, what would you choose?

My plans are to work on:

  • Listening to audiobooks as I commute
  • Waking up earlier
  • Prioritizing my to-do list the night before

I would love to hear what area you are focusing on – please leave your comments below!

The Five Lessons a Millionaire Taught Me About Life and Wealth by Richard Paul Evans

Let me share with you a few book titles on my bookshelf that have to do with money:

  • Think and Grow Rich
  • How Rich People Think
  • As a Man Thinketh
  • Mind Over Money
  • Wired for Wealth – Change the Money Mindsets That Keep You Trapped
  • Conscious Finance

Did you catch a theme there? It was something I hadn’t really noticed before. Clearly, according to these authors, wealth has more to do with your mindset and your thoughts than your habits.

5 lessonsToday’s post deals with that same concept. I am going to review the book The Five Lessons a Millionaire Taught Me About Life and Wealth by Richard Paul Evans (#1 New York Times bestselling author of The Christmas Box). I picked up a copy at the local library and read it in one sitting. It’s an easy read (93 pages of content and an additional 70 pages of resources), but definitely worth your time.

Evans learned these lessons at a young age from a millionaire and went on to change his mindset, incorporate them in his own life, and make a lot of money. He teaches five lessons or principles that he says will lead all who follow them to wealth and financial independence. In fact, he says that all wealthy people share this common denominator – they understand the principles of accumulating wealth and follow them (and by wealthy he isn’t talking about those who win the lottery or inherit a fortune then go broke 5 years later, but truly wealthy people who earn and keep their wealth).

None of these principles are new – you won’t find anything earth-shattering in the five lessons. In fact, they will seem very ordinary to you. However, very few people actually follow them. I discovered areas that I can improve and plan to sit down with my wife so she and I can decide together how to better live some of these principles. I also plan to teach these principles to my children in ways they can understand.

Here are the five lessons:

Lesson One: Decide to be wealthy

Evans says this is the most important principle and that wealth is a mindset – it’s all or nothing. Bryan Tracy, another one of my favorite authors, says that it never occurs to most people that they can be wealthy and that “the primary reason for underachievement and failure is that the great majority of people don’t decide to be successful. They never make a firm, unequivocal commitment or definite decision that they are going to become wealthy. They mean to, and they intend to, and they hope to and they’re going to, someday. They wish and hope and pray that they will make a lot of money, but they never decide, ‘I am going to do it!’ This decision is an essential first step to becoming financially independent.”

Lesson Two: Take responsibility for your own money

You need to know how much money you have (by calculating your net worth monthly and annually), know where your money comes from and where it is going (budgeting). If you don’t control your money it will control you.

Lesson Three: Keep a portion of everything you earn

As George Clason says in The Richest Man in Babylon “a part of all I earn is mine to keep.” Evans says that millionaires save between 15-20% of their income and recommends that you start with a minimum of 10% of your salary and 90-100% of any side earnings.

(Consequently, the book The Richest Man in Babylon is one of my favorite books about money – you can read it for free here: http://www.ccsales.com/the_richest_man_in_babylon.pdf).

Lesson Four: Win in the margins

This principle is the one that will help you increase your nest egg as quickly as possible. The basic idea is to look for ways to increase your income and decrease your expenses. Evans goes through a number of different ways to look for deals and decrease expenses. He says that one of the best ways to save money on a purchase is to ask “Is that the best you can do?” This seems to especially be true with high-ticket items.

Lesson Five: Give back

Evans donates 10% (or a tithe) of his money and says that he has never felt the loss of the money but instead has felt specifically blessed for his contributions. My wife and I do the same thing and feel the same way that Evans does.

Those are the five lessons. Are you surprised at all by the simplicity? I would guess that you are. Like I said, none of the ideas are earth-shattering revelations. How many of them are you actually living, though? If you are intrigued by these ideas I highly recommend you pick up a copy of this book and make some plans to improve.

How Rich People Think

by Ryan Law

How Rich People ThinkI recently picked up a copy of the book How Rich People Think[i] by Steve Siebold. In the book Siebold shares 100 lessons he learned over a period of 26 years as he interviewed some of the wealthiest people in the world. The book reminds me of a few of my other favorite finance books, including The Millionaire Next Door and Think and Grow Rich. These books don’t focus on money per se, but how rich people think and act.

In today’s post I will share several of Siebold’s lessons.

#13 Middle class believes money is earned through labor…World class believes money is earned through thought

“The average person believes the harder they work the more money they’ll make. Their linear thinking equates labor and effort with financial success. This is why most people aren’t rich. They’re following an outdated model of success…The rich know that creative thinking is the highest paid skill in the world.”

This idea of creative thinking is a theme throughout the book. Siebold mentions numerous times that the best thing you can do is work on training your mind to find solutions to difficult problems. “The rich get richer,” Siebold says, “because they know the world is overflowing with wealth disguised as problems that need to be solved.” One way he recommends you train your mind is by investing at least one hour per day studying subjects that will help you move toward your vision.

#20 Middle class earns money doing things they don’t like to do…World class gets rich doing what they love

Surely you have heard the philosophy that you should “do what you love and the money will follow.” Do you believe that is true? On the last day of my class each semester I ask the question “How many of you truly believe you can do something you love and get paid well for it?” Most students raise their hands, but the reality is that most people don’t like what they do. Forbes reported on a study that showed that only 19% are satisfied with the work they do, 16% are somewhat satisfied and almost 2/3 of all people are dissatisfied, or unhappy in the work they do.[ii]

There is a great video narrated by Alan Watts called “What is Money Was No Object?” that discusses this theme. Here is a link to the video: http://www.youtube.com/watch?v=C_sbcSRMsOc

Siebold says that “…passion is the real secret of getting rich…The rich go to work every day feeling passion for what they do, and their passion fuels their efforts.”

#50 Middle class dreams of having enough money to retire…World class dreams of having enough money to impact the world

What is your major money goal? Siebold says “…the masses major goal with money is to retire at 65 and hopefully have enough money to survive until they die. The world class, while often no more ambitious, set their sights on impacting the world with their wealth.”

Most people want to make a positive impact on the world. Think about some specific things you could do to make a difference for other people if you had the money to do it.

#58 Middle class have loosely defined goals with flexible deadlines…World class have highly defined goals with do or die deadlines

Jim Rohn, a famous speaker, author and consultant tells a story of meeting with his mentor, Earl Shoaff, for the first time. Shoaff said, “Let’s start with reviewing your goals.” Rohn said he didn’t have them with him so Shoaff said “Are they in your car? Why don’t you go get them so we can review them.” Rohn said they weren’t in his car and in fact he didn’t have any written goals. Shoaff then drilled into Rohn’s head the importance of having goals, and Rohn went on to equate this one principle with the majority of his success.

Siebold says only 3% of people have goals specific enough to generate the level of mental energy required for success, while “World-class thinkers focus on the single most important goal they desire and set a deadline for its achievement…Their do or die commitment to building a financial empire virtually guarantees their success.”

Here are a few of Siebold’s other lessons. World class…

  • Believes building wealth is a team effort
  • Focusses on money making activities
  • Has an action mentality
  • Takes calculated risks
  • Believes money is about freedom
  • Believes in self-reliance
  • Is internally motivated to make money
  • Believes starting a business is the fastest road to wealth

I encourage you to read books like this that challenge your thinking. You may not agree with everything Siebold or other authors like him say, but I believe it is a healthy thing to read things like this and seek for ways to improve your thinking.

 

[i] ISBN 978-0-9755003-4-7 Published by London House Press

[ii] http://www.forbes.com/sites/susanadams/2012/05/18/new-survey-majority-of-employees-dissatisfied/