Tried And Tested: Pay Yourself First

I spoke to my grandmother last week (she reads the blog on her snazzy new computer she just got) and she told me the advice her boss gave to her many years ago.

He said that before you pay the bills and before you go spending your paycheck, pay yourself first. Put 10% aside and then go pay the rent, utilities, etc.

I’ve heard this advice a million times on various blogs, but as much as people come up with creative ways to save a few bucks on taxes or search the weekly circular to save a few cents on pasta, nothing can replace the best way of saving and making sure we have enough money in the future.

Sure, you may make more in the future as you get a better job and more opportunities open up, but saving now can have a lasting impact. There is always enough to put a little something away. Even if you think that money won’t make much of a difference, it definitely will.

I’ve seen this graph several times, but for those who haven’t seen it, look at how much of a different putting money aside now is compared to waiting.

Taking a look at the numbers, it’s astounding how much of a difference paying yourself first makes. Consider this example:

Alex is 25 and saves $5,000 a year for 10 years, and after 10 years, has a cool $73,000 in his bank account from his $50,000 in contributions. Then he doesn’t contribute another cent until retirement.

John is 25 but decides that he’ll be able to make up the difference later. he waits 10 years, then contributes $5,000 a year for the next 30 years, for a total of $150,000 in contributions.

Who do you think has more money at age 65?

Despite contributing 3 times as much as Alex, John has about $55,000 less at retirement, assuming a 7% return on investment.

And what happens when Alex doesn’t stop saving at age 35, but keeps investing $5,000 a year for 30 more years? He ends up having over twice as much as John. Can you believe that those ten years delaying cost John over $600,000?

There really is no replacement for saving. As you get older and make more money, you will also have more responsibilities and saving will be just as hard. So do yourself a favor: start saving TODAY by making your “pay yourself first” bill more important than than the rest, and you’ll be doing yourself a half a million dollar favor.

9 Responses to Tried And Tested: Pay Yourself First

  1. It was graphs like these that made me first pay attention to my money. It’s staggering how much of a difference starting early and staying with it pays off in the end.

    It’s also graphs like these that make me question why are high school and college students aren’t learning this stuff in money classes.

    Let’s get these students educated about their money so we can starve off America’s money ignorance.

    Good stuff, my friend.

    - Austin @ Foreigner’s Finances

  2. Ah, compound interest, the most powerful force in the universe. Always good to see a solid illusion of it in action, and all the advantages of starting to invest early and often. Good show!

    • It really astounds me how much money can grow if you start early. I’m hoping I’m able to increase my contributions each year and be able to appreciate what I’ve done in 20 or 30 years.

  3. This is awesome info, but what if you lived below the poverty line when you were 25, or — for whatever reason — you find yourself at age 40, and only just now in a position to be able to save? You’re screwed. Is there anything you can do other than start saving like crazy? I’m not even in a position to do that — my husband is out of work, we’re already living frugally, and we can’t pay all our bills each month.

  4. Great post! I love talking about this topic and actually just posted on the same topic! I like the charts, excellent visual aids.
    .-= myfinancialobjectives´s last blog ..The Ultimate Motivator: Compounding Interest =-.