Back to the book “The Richest Man in Babylon”, here is another lesson that I feel is important to share. “Put in 10 pieces of copper into your purse but only take out 9”. When working for pieces of Copper keep 1/10th of what you earn and save it. That will start building your ultimate wealth. In modern days the advice can be applied by putting 10% of our paychecks into a savings account. The book talks about investing a little later on but this piece of advice is the most important to start off. Without the savings, we will have nothing to invest.
This advice is pretty common and can be found in almost any personal finance strategy or book. It might be written differently or sound different but they are all the same. Rich Dad, (Robert Kiyosaki) says to “Pay Yourself First”. Before paying bills or buying what he calls “doodads” (things that we spend money on that don’t put money back in our pockets), we must take a portion of our paycheck for ourselves.
In “The Automatic Millionaire”, David Bach mentions the same thing. The first step to becoming an automatic millionaire is to pay yourself first. Preferably 10% of you salary if possible. Bach says that if you have the money taken from your paycheck and automatically placed into your savings, you won’t even notice that it is gone. It’s weird but most people can live off of 90% of their paycheck, no matter what their situation is. If it is out of site, then it’s out of mind. We know this because we see people getting raises in their paycheck every day and yet, these people do not start saving more, they start spending more. The more money people make, the higher their lifestyle becomes. There are people who make 7 figures a year and still live paycheck to paycheck and then there are people who in their best year made under $60,000 and retired millionaires. That is the story of the first automatic millionaire that Bach speaks of in his book.
I personally agree with the advice to pay yourself first or save 10% or however you want to put it. I also agree that once you start doing this and make it automatic, you don’t even notice that it is gone. I have direct deposit for my paycheck and regular transfers of at least 10% to my savings account. I don’t notice a change of lifestyle or anything… until I look at how much is piling up in my savings account.
My finances are so automatic that it is like a computerized game that just continues calculating my savings as my turns (or weeks) pass. The money comes in through direct deposit, automatically money is transferred to different accounts of mine such as savings, fun account and charity. The rest of my paycheck stays in my checking account which has automatic bill payments for all of my other expenses including rent (I’m looking to buy but more on that later), credit cards (I only spend what I have in my checking, I use credit cards because I get points, longer to pay and I get a full spending summary at the end of each year), gas and electricity ( I pay the same every month and get a credit or bill for the difference at the end of the year so I don’t have to calculate and I Can budget better), cell phone (the bills are always wrong so this is a little headache), and all the other fun bills that overflow from my mailbox.
I do check each of my accounts including all bank, credit card and other major accounts at least once a month to make sure that everything is working properly and to watch my savings grow.
Now that I have savings built up, it is time for the next step, to start investing and take advantage of one of the greatest tools in the financial world, “compound interest”. I suggest you do the same. Some people seem lucky because they saved money and invested well but knowing what to do and when to do it is how to get lucky. If you have any similar stories, please leave a comment.