WHAT IT MEANS TO PAY YOURSELF FIRST AND GROW WEALTH?

What is the definition of PAY YOURSELF FIRST?

It simply means you must put money aside for yourself to invest before you pay for any other expense which includes rent, mortgage, food, grocery, Taxes, Phone bills, Credit Cards etc.

What is the idea behind PAY YOURSELF FIRST?

• To make investment and your future a priority
• To make wealth creation a priority
• To push yourself to save first instead of spending
• To cut cost from your expenses because you do not have that extra money anymore
• To push yourself to earn more to fill the gap of money you put aside already

Let us look at the example of PAY YOURSELF FIRST

Let’s say you make $2,500 per month and your expenses are about the same, so you basically spend whole $2,500 every single month without having any kind of saving or investment. It is because you need to fill all your basic needs, everybody has that excuse.

Now, you heard about PAY YOURSELF FIRST principal and really interested to test it. You put aside $200 as soon as you receive your paycheck. Now what?

This means you may want to cut that $200 from somewhere, may be less food take outs, or start making coffee at home or cut your cable or cut your phone or what ever you can think of is least useful and you can live without it. You have no choice now as you don’t have those $200 anymore and you must cut down some expenses to be even.

You may think it’s impossible, but that’s just illusion because we waste so much money on things which are not required. You must be able to save more than $200 next month, and you need to keep on doing it until you hit %15 of saving which is $375 per month.

WHAT TO DO WITH YOUR SAVINGS? DO YOU LIKE TO SEE HOW TO BECOME MILLIONAIRE WITH JUST $375?

I assumed you are 30 years old and you like to have $1 Million at the age of 65. You will be investing $375 per month for next 35 years with the return of 8% per year and you will be increasing the deposit by 2% per year.

I did not say 10% or 12% rate of return, it is just 8% which is very much possible. Let’s look at how to get 8% return from stock market.

COMPOUNDING – HAVE YOU EVER HEARD OF 8^th WONDER OF THE WORLD?

First, I strongly recommend you read THE COMPOUND EFFECT by Darren Hardy.

It’s compounding which will convert your $375 investment per month into $1 Million Dollars. Your money is Compounding when you make interest on top of interest.

EXAMPLE OF COMPOUNDING

Let’s start with $1000 with 10% (to keep calculation simple).

Year 1 – You will make $100 return. Total – $1,100

Year 2 – You will make $110 return; you are making $10 more because of compounding as you make 10% on the $100 return you got from Year 1. Total – $1,310

Year 3 – You will make $131 return; you are making $31 (compare to Year 1) more because of compounding as you make 10% on the $1310 return you got from Year 2. Total – $1,441

So on.. You see, you are making more money every single year without even investing more money.

EXAMPLE OF TURNING $375 TO $1 MILLION

Let’s look at below picture – You started with $375 per month at the age of 30 and you will invest around $225,353.16 in 35 years and it will be compounded over time to become $1 Million dollars.

Source for the chart: www.Thecalculatorsite.com

If you look at the chart closely, you will see you are not even close to million dollars around the year 25 and most of the people quit because they think it’s not possible. But that’s when you hit exponential growth because of compounding. You will still make it close to Million dollar even if you stop investing anymore around year 25^th.

So, the point here is to start small and start early. It’s very difficult to catch up if you want to start when you are around 35 – 40 year old.

STARTING AT AGE 35

You will have just $684,796.33 at the age of 65 by start investing same $375. You can see how just waiting of 5 years almost cut 40% returns.

Surprisingly, you will have to start investing around $600 to reach $1 Million if you start at the age of 35. Note, you will have to increase your investment by 2% every year.

STARTING AT AGE 40

You will have just $427,951.29 at the age of 65 by start investing same $375. You can see how just waiting 10 years cuts your return by over 50%.

Surprisingly, you will have to start investing around $900 per month to reach $1 Million if you start at the age of 40. Note, you will have to increase your investment by 2% every year.

MY REGRET

I have just one regret which is NOT STARTING SOON ENOUGH. Luckily, I still started this few years ago and it took me just few years from making $100 per month to being Millionaire

I will be working on next blog on how to get over 8% returns in stocks. Subscribe and Leave a comment below if you interested to learn more about this.

Do you have a big goal in your life and how are you planning to meet your goal? Leave comment below if you already started investing and at what age?