Gen Y Capitalist

Paying yourself first is a concept that’s been long touted as a basic tenant of personal finance.
See description at Get Rich Slowly.

The oft – repeated premise is that you should put aside a portion of your earnings monthly and automate savings. Before paying any other bill, an amount is set aside in a separate account.

If you set aside the right amounts each month and earn your estimated returns, you’ll be able to achieve financial independence at some point. But we can do better. Here’s why paying yourself first leaves you middling in mediocrity.

You’re giving up control of your life

You pay yourself like a bill. If you’re entitled to a fixed monthly payout, what does that make you? Another debt holder. You’re relegating yourself to the same status as your student loans or phone bill.

If you give yourself a slice off the top, who gets the rest? Who gets the residual income?

Owners and savvy rich people get paid last. They also get paid the most. Business owners pay themselves after their suppliers, their employees, and their creditors. They own their operations and are entitled to the residual income after costs. They can squeeze costs when times get tough to keep their earnings high.

Look at corporate america in the past couple of years. Earnings growth is far exceeding revenue growth because they’re able to keep their costs down. Start thinking like an owner.

Pay yourself last, but pay yourself the most.

You’re actually enticing yourself to spend

When you allocate savings at the beginning of your budget, what do you do with the residual after expenses? You’ve already framed savings as a “cost”, something that’s unfun and as much as a hassle as any of your other bills. Certainly you want to spend what’s left over on “good” things. The strategy of paying yourself first suggests that it’s okay to spend this because you’ve already saved for the month.

If you save first, you’ll want to leave a cushion for unexpected expenses so that the amount you save at the beginning of the month won’t prevent you from making ends meet. This is an amount you wouldn’t have needed in most months but will now end up spending because that is how you’ve established your mental model – it’s your leftovers after savings.

If someone else is able to persuade you to forfeit your residual cash flows to them, they effectively own you. They’re the majority shareholder in You INC. Are you a slave to consumerism? 

You shouldn’t need to hide money from yourself:

Sure it forces you to save, but you’re still thinking like Joe consumer. Are you tempted to spend your money just because you have it? That’s not a mentality that’s going to get you very far.

I don’t hide anything from myself. I’m not tempted to spend more than I should, because my (as of now modest) savings represent freedom.

The takeaway: taking ownership – It’s ALL your money

Every dollar in my account is mine. I earned it. I sacrificed, created or risked something to earn it. As such, I’m not going to content myself with a small slice off the top. It’s should all be MINE.

Everything else is an expense. These reduce my net income and are to be eliminated mercilessly possible unless they sufficiently improve my quality of life to compensate.

Summary: My interpretation of how people think 

1. Irresponsible spender
Stuff mindlessly purchased
Plus excessive bills
Less salary
Debt

2. Pay yourself first
Salary
Less pay yourself first (savings)
Less debt payments
Less bills
Disposable income to waste on consumer goods / cash flow to others (people I ceded ownership of myself to)

3. OWNER MENTALITY
Salary
Less all expenses
Residual income for ME. One step closer to financial freedom and being rich.