Investment Series - Pay Yourself First

 It has been nine years since I first came to the United States. Through these years, I have gone through many different experiences. First I was a student. Next I worked in a company as an intern. And now I am about to finish my tenure with that company after 8 years of service. The one thing these years have taught me is that making money is not enough to build wealth. 

Let's consider Average Jane. Jane makes $85,000 a year from her job. Her after tax take-home pay is after all the deductions is $4,500. Jane lives alone in a small town just like the one I live in. She has very little core expenses (housing, transport and food). Jane is fortunate enough to not have any student loan debt as her parents were generous enough to support her through college. She starts noticing the cash coming into her account. Prior to this moment, Jane has never had this much money at her disposal. She is unprepared. She thinks money is for spending and finds ways to spend her money on things which she likes. Now she is at a point where she is spending almost all of her income. Which means her net cash flow is zero (cash flow= income-expenses). This is not far from the truth of many people in the US. And it is certainly not how wealth is built.

Jane has a friend Jill. Jill has about the same income as Jane. She notices that Jane is scrambling to pay her bills at the end of the month. She talks to her about paying herself first. 

"What does that mean?" Jane asks.

"It means you put money aside for future needs first. Spend only on things you need like rent/mortgage, food and transportation. Minimize discretionary spending of large amounts."

"But isn't that depriving myself of things I like?" Jane asks again.

To answer Jane's question, let's think of this a little. We live in a society where according to George Carlin, people buy things they don't need with money they don't have. Many people try and keep up with the Jones's. Somehow, no one pauses to question the consumption madness. When articulating metrics, news channels call people consumers. This speaks about where our priorities lie. 

Paying oneself first calls into question the consumer mindset. Asking questions like - Do I really need the 80 inch TV to replace my 50 inch one, is important for this. According to Thomas J Stanley, in his book A Millionaire Next Door, wealth is built by being conscious and conscientious of one's spending and cash flow. He mentions how people who are prodigious accumulators of wealth (PAW) tend to look for deals and bargains while buying things. On the other hand, under accumulators of wealth (UAW) don't know anything about where their money goes.

I still remember the day I looked at our credit card accounts on the aggregator I use and found that between me and my wife, we had spent $400 on one restaurant in the span of a month. I was mortified. That was the day, I made a resolve to be conscious and conscientious of our spending. Now I look at our money everyday. Wealth is built one dollar at a time and knowing where your money goes and paying yourself first is crucial in this process. It may seem simple but adopting this mindset can be difficult.