Pay Yourself First
Big Rocks vs Sand
There is a classic story that is always told about the professor who presents to his class an empty jar. This represents your life. You then have another jar full of sand and yet another jar full of rocks. The sand represent the small stuff and the stones represents the big, important stuff. He pours the sand into the first empty jar. Then he tries to pour the rocks into it, but there is not enough room. He then does it in reverse. He pours the big rocks into the empty jar, and the sand pours in easily between the rocks. This represents how to prioritise your life. If you always prioritise the small stuff by pouring that into your life jar first, or filling your days with “busy work” you never have room for the big important stuff.
This is usually a metaphor for how people spend their time and I love the idea. In the art of time management it is always best to spend your time on your most important task. It is too easy to get distracted by small interruptions. That is why rich people get other people to do mundane tasks for them (cooking, cleaning, chores, errands) as that is not a productive use of their time. It makes sense and time really is our most valuable asset.
This same principle applies to money management too.
Saving Money
A lot of budgeting plans involve such suggestions as “cut back on your $5 latte every day and you will earn an extra $150 a month”. I am all for not wasting money on stupid things, but you really need to start with the big rocks first.
It makes sense to make your biggest efforts towards saving money against your biggest expenses. You need to take a hard look at your big items and try to make money saving decisions in those areas first, before you cut out the daily coffee.
By saving money on the big items you make the biggest impact on your financial life.
The average American family spends over 70% of their income on three things:
Housing
Transportation
Food
The two most impactful categories are:
Housing
Transportation
1. Housing - You really need to take a hard look at what you are spending on accommodations every month as a percentage of your net income. This often tends to be our largest expense and is where we can potentially find our biggest savings. We hate to look at this area as we often find ourselves quite attached to where we live as we associate it with “home” and it makes us feel safe and secure. It is also a huge pain in the neck to pack up and move somewhere new. It is disruptive to our lives and can cause a lot of upheaval. But if your living expenses are costing you more than 50% of your net income, you have some thinking to do.
You need to find a new place to live.
All we really need is a warm safe environment where we can rest and enjoy time with our loved ones. That is a pretty simple objective. You know what else makes us feel safe and happy? Having money. Not stressing about making ends meet. In my article about Money and emotions I stress that spending less than you earn is the key to happiness. I stand by that. By living somewhere that suits your income level, you are setting yourself up for long term happiness. You are enabling yourself to have extra money at the end of the month that you can use to invest or pay down debt. You are accepting where you are starting from and being realistic. This is the first step to financial freedom. Starting from where you actually are. Moving to a cheaper neighbourhood is a massive step forward in getting your act together. You don’t have to live there forever, you just need to start creating your new wealthy habits. This means taking back control of your spending and your life.
2. Transportation - This is another way people are wasting money. My father bought a new car every three years. He believed that this was an important status symbol and he was mortified if his brother brought a nicer car than him. This is ridiculous. Why would you even buy a car if you didn’t need to? Take the bus, ride a bike or walk to where you need to go. Depending on your lifestyle, you need to reassess whether you really need a car. Cars are expensive. There are the payments , insurance, gas, repairs, washes, maintenance. If you add up everything you spend on a car in a year, you might be shocked. Now compare that to if you brought a monthly or annual transit pass. Maybe the odd time you took an Uber or rented a car or truck for special occasions. Do the math. Figure out if owning a car is even worth it. There are many places in the world where people just walk everywhere they want to go. Walking communities are a growing trend and I hope it continues. As per item #1 above, move closer to your work, so you can walk there. You will save a ton of money. Unless your job is in an expensive neighbourhood. Then maybe not.
Investing Money
As much as saving money every month is an important first step to financial freedom, I believe that if we adhere to the principle of prioritising the “big Rocks” first, then we need to “Pay Ourselves First”. Pay Yourself First has been a mantra of financial gurus for a long time and rightly so. It is the most important principle in obtaining financial freedom. This should be your first rock. Invest your money.
Investing always seems to come last on most peoples list, and it should be first. Why? Because it is HARD. It is hard to part with money that you could be using for a ton of other things that may or may not enhance your lifestyle in the short term. It is hard to have the patience to put money into an investment and not see any substantial returns for a long time. It is hard to have to live without a few luxuries in order to feed your nest egg. It is hard to have money invested and not be tempted to spend it.
Because it is HARD, that means it is worth doing. If financial freedom were easy, everyone would be doing it. I don’t personally know very many people who I would consider financially free. Most people I know are caught up in the middle-class, “spend more than you earn”, “keep up with the Jones’” lifestyle and they don’t know any other way.
By investing your money, you are giving yourself power. You are giving yourself the ability to make your own choices. You are freeing yourself from indentured servitude and gaining the most valuable of all assts, time.
In my book BYOB: Be Your Own Bank, I offer a plan to financial freedom that makes the “big rocks” a priority. A BIG priority. You will learn how to “Pay Yourself First” in a HUGE way, and not have to live like a pauper. My plan involves leveraging dividend paying stocks to increase your monthly cash-flow at an accelerated pace. Every month you gain more power to live the life of your dreams.
I love the saying “If you are willing to live like no one else NOW, you can live like no one else LATER”
This speaks to having discipline and restraint in the short term in order to have abundance and freedom later. You are living in a time of opportunity. Use this opportunity to create a life that is extraordinary!