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Things to Consider |
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How much do you really know about paying yourself first?
- How much can you afford to pay yourself?
- Do you know where to put the money you pay
yourself?
- Are you actually doing it?
- Is your plan to pay yourself an automatic one?
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The millionaire next door to you figured out long ago
that investing was one of the easiest possible ways to
build wealth. Unlike earning a salary, investing works for
you instead of you working for it. How? It helps you take
advantage of the power of compounding.
It's a lot easier than you think. You don't need to be a
financial wizard or spend a lot of time on it – you just need
to start paying yourself first.
Consider this story about Jim and Pam, who are currently enjoying
retirement.
Jim had been a factory worker for 30 years, working the
second shift. His wife, Pam, had been a stay-at-home mom
who raised two children. They lived in an average, working-class
neighborhood their whole lives. Yet they retired in
their 50s as financially independent millionaires.
Seems hard to believe that on one modest income, raising
two kids, they could retire at such a young age with so much
wealth. In fact, when you meet them, you'd never guess they
were so financially secure. They drive unassuming cars and
live in a modest home that's not much different than the
average American's.
So how did they do it?
They didn't strike it rich in real estate, nor did they receive an
inheritance from their parents. They simply learned how to
make the most of their money while they were young and
took it upon themselves to always pay themselves first. They
were quick to realize that later in life, no one was going to
pay them in retirement except themselves.
They made a few smart moves, like:
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Avoiding debt when possible, knowing that borrowed
money usually costs more than what could be earned by
investing the same amount.
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Taking good care of their cars, knowing that an extra year
would buy them a couple thousand dollars.
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Living a good life but not living beyond their means.
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Developing money-conscious habits like clipping
coupons and shopping for sales.
Perhaps more importantly, they:
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Started early.
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Set up an automatic investment plan, so they were never
tempted to spend the money.
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Diversified their investments, including stocks for their
long-term goals and money market funds for emergency
cash needs.
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Increased the amount they were investing whenever Jim
earned a raise.
Jim and Pam didn't need to sacrifice life's little pleasures.
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Things to Consider |
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There are a variety of ways
to cut costs, and here are a
few of them:
- Only use ATMs within your network.
- Rent movies instead of going to the theater.
- Carpool or take public transportation.
- Lower your thermostat.
- Wash your own car.
- Buy a one-year old car vs. a new car.
- Buy the home you need, not the biggest you can afford: consider the long-term savings on furnishings, heat, mortgage and taxes.
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If you're thinking that Jim and Pam had to give up a lot to
achieve their goal of retiring early, think again. They simply
made budget decisions and gave up those things that
were less important to them. They were willing to forego
extravagant vacations but still enjoyed taking the family to
Florida or Myrtle Beach for an entire month every December
while the factory was closed. They rented a condominium
with a kitchenette and frequently ate in.
Today, they enjoy the early retirement that they dreamed
of. They have nestled into
a modest home with plenty of space. They shop around for good deals on flights and visit the kids
throughout the year. In retirement, they treat themselves to
dining out more. They've also bought a new car, just because they wanted one.
Because Jim and Pam have always watched their money,
they can now afford the early and enjoyable retirement
they live today.
 Next: Invest as early as possible and invest often
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