July 31, 2013, 5:00 am

Pay Yourself First, a Financial Cliché that Works

by: The Financial Blogger    Category: Financial Cliché,Pay off your Debts
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I’ve heard the “Pay Yourself First” Cliché so many times that I have seriously started to doubt the process. It sounds so simple that is becomes unrealistic. I always thought that money has to come from somewhere no matter what you decide you do with it. But after my latest personal finance experience, I have started to doubt it!

 pay yourself first

How the Pay Yourself First Process Works and Why It’s So Cliché!


I’m sure you all understand how to use the “pay yourself first” method, but just in case you have been hunting bears inNorthern Canadafor the past 25 years, here’s a quick refresher. When you use this strategy, you determine yourself as being your most important creditor. Forget about your mortgage payment, food and electricity bills; the first place the money goes is to you.


This is why you should setup a systematic investment into a cash account (or a money market fund) that will be taken as soon as your paycheck is deposited. This is why it will be the very first thing you pay with your income. This money can be used to pay off debts, go on vacation or fund a project such as retirement, buying a home or your children’s education. The point is never to use this money for anything else but its purpose. It truly becomes your priority.


Where’s the Cliché Part?


Telling people to pay themselves first just sound like wishful thinking. You simply have to setup the automatic payment that will take money outside of your account and you will be able to save money. You can *technically* save for anything you want, all you need is to setup this periodic investment.


I used to think that if you can’t afford to go on vacation, it’s not putting money aside from a deficit budget that will make it happen. Sooner or later, you will be forced to take money from your line of credit or credit card to fund other operations while your savings grow. And if you net your assets and your debts, you will still be in the hole. So many financial gurus used this tag line that it started to turn me off.


But I am Converted and I’m Now a Believer!


I guess that the ultimate purpose of life is to learn something new, isn’t it? Well this is what happened to me over the past 12 months; I used the “pay yourself first” technique and realized that it worked!


In 2012, one of my personal financial goals was to open anRESPaccount to fund my children’s education. I wanted to start with a systematic investment of $200 per month. I have three children and I really want them to go to school and do what they want with their life. This is why going to school is so important for me. A year later, I opened theRESPaccount and it is now has over $3,600! At this pace, they will have roughly $90,000 to split when they will start University. With $30,000 each, I will be able to pay a good part of their stuff!


The most incredible part is that I didn’t go into more debt since I started saving money for my kids. In fact, my debt level is pretty stable as you know already. But I didn’t increase it by $3600 either!


This is why I believe that wishful thinking might work again to a certain degree. By taking away $200 per month from my bank account, I force myself to think twice about other expenses such as restaurants, vacations or renovations. I have to think twice because my bank account is now showing as much money as it used to since the extra is being sent to another account; my kids account. Who would be evil enough to take money out of a kiddy account? I can’t do that! Hahaha!


I Like It and I Want More!


It’s working so well that I’ve started an additional investment on the side. Later in 2012, I opened another RESPfor my nephew. I’m putting another $25/month aside for him. It’s not much but since I opened it for his 1st birthday, he will still have around $10,000 at the age of 20.


Then, I started to think about my three kids going to a private school for high school. William is making the big step in four years so I better be ready. Here comes another $100 per month in a TFSA!


Once my wife starts her daycare in September, I will set another systematic payment of $1,100 per month toward my line of credit (currently at $100). I reviewed my debt payment plan and started with my highest interest loan; the pool loan. In 5 months, I’ll clear this debt with the money available in my line of credit. Then, I’ll hit my personal loan for another 5 months and so on.


If it all works out, I might as well start a savings account for my municipal taxes, vacations and car & house maintenance. By opening three more accounts, I’ll be able to create cash reserves all over the place and never have to run after my money again. I better do that right away now that I’ll have extra income coming in! hahaha!


Do You Use the “Pay Yourself First” Method? How Does it Work For You?

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Things really compound after a while don’t they?

Just maxing out your 401k here in the US for 10 years will probably lead you to having $200,000-$300,000 by the age of 33-35!

Besides, based on my latest post on FS, you Canadians are ROLLING in dough!

I was always a saver! I started saving as a child and it carried into adulthood. One of my first career jobs allowed for a payroll deduction to automatically go into my savings account. Sometime later, I continue a payroll deduction for a 401K. I find it much easier to just live on what is left. It also puts the priority on saving.

by: The Financial Blogger | July 31st, 2013 (12:34 pm)

Hey Sam,

It all depends at what age you start saving 😉 in Canada, we can’t save more than 18% of our income in what we call the RRSP. So unless you start at 100K at the age of 20 and savie 18K for 13 years, it will be very hard to show 300K in your retirement plan by 35 in Canada.


I’ve always saved 8% in my employer stocks and its true that it’s better never to get this money in hand! hahahaha!

This was the first lesson I used to teach kids as part of Camp Millionaire, a one day program for teaching kids the basics of personal finance. It works and should be used by more people, especially those living pay cheque to pay cheque.