Starting your journey is the most difficult hurdle to investing in retirement or any other long-term goals. In the beginning, you must make a deliberate decision to invest some money that you would rather use to buy a Sam Adams at happy hour. I know, because we all would rather spend that money on happy hour.
The trick to investing rather than overspending at happy hour is to make the decision to invest once and then let your money automatically invest itself going forward. Take away the decision-making aspect of how you will spend that money.
You can take away that decision-making variable by paying yourself first.
What Money?
Paying yourself first means you allocate money towards your investments before you ever see your money. The first place any money goes is towards your investments, and you never have the chance to consider it for potential Target run money. If your employer offers a 401(k) or other retirement plan, this is typically pretty easy to set up once and then forget about until the next point you want to make a change. Most employers allow you to contribute a certain dollar amount or percentage of your salary directly to a 401(k), so you never see the money in your paycheck. The paycheck you receive is slightly lower because you already paid yourself first.
The more you can pay yourself, the better. If your employer also allows you to allocate money to a health savings account or a second retirement plan, do it as soon as you have the financial means to contribute. If you do this from the moment you start working for your employer, you will never miss the money in your paycheck because you never felt like you had access to that money in the first place.
The $1,875 per month it takes to maximize a 401(k) in 2023 simply never arrives in my paycheck. My paycheck is lower because that money was removed before I could miss it. I pay myself first (and quite well) every month without ever thinking about it.
Hide Money from Yourself
Paying yourself first can be a bit more difficult if you are self-employed or your employer does not offer a retirement plan. You have to simulate this disappearing money yourself. There are a couple ways to do this:
Have your paycheck deposited into separate checking accounts so your spending money comes to a different place than the money you will use to pay yourself.
Set up automatic transfers to move the money from your paycheck to other accounts the day after it is deposited in your checking account.
If you have a tendency to spend money immediately after you receive it, option one may be for you. Otherwise, option two is easier logistically because you do not need an additional bank account to make it work. Regardless of which option you choose, once the money is in its final checking account the process is the same.
Set up automatic transfers to send money to accounts like a Roth IRA, high-yield savings account, and brokerage account. Wherever you want to pay yourself, send up recurring transfers that automatically ship the money to those accounts the day after your paycheck arrives. This takes the money out of your account almost as soon as you have it so you cannot consider it spending money for a bonus takeout dinner.
Build Wealth Without Thinking
The more you pay yourself first, the quicker you will build wealth. At the moment, 54% of the money I could receive in a paycheck is automatically deposited to my 401(k), HSA, Roth IRA, brokerage account, and Fundrise account each month before I ever see it. The 401(k) and HSA portions are already gone before my paycheck hits my checking account because my employer automatically deposits them. I then have recurring automatic transfers send additional pieces of my paycheck to my Roth IRA, brokerage account, and Fundrise account the day after my paycheck arrives.
In addition to this 54%, which is all for long-term investments, an additional 23% of my net income is automatically removed from my checking account and deposited into a series of high-yield savings accounts according to how much I prefer to spend on each category throughout the year. In any given month, I may withdraw more or less than I deposit into those high-yield savings accounts each month, but the annual amount evens out over time.
That means recurring monthly transfers account for 77% of my net income. About 77% of my income is filtered right where I want it without me ever thinking about it.
What about the other 23%? That pays for my portion of the mortgage, HOA fees, and cost of a monthly home cleaning service. I am highly motivated to keep my home, so I am not worried about letting myself down and not paying those expenses.
For daily expenses, I pay for everything using my credit card and pay off the credit card with money from the correct high-yield savings account buckets. Some months, I catch myself thinking, “I spent more than I deposited in my accounts this month!” This momentary panic can sometimes make me think I am net-negative from the money I received that month. However, that is only net-negative relative to the 46% of my net income that went towards my home and HYSA spending buckets.
I already paid 54% of my income to myself first. It funds multiple long-term investments every month, preventing me from frivolously spending more than half of my income on daily expenses. No matter what I do with the other 46%, I am free from financial worries because I paid myself first.
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