Badass vs Dumbass
Master your Financial Kung Fu to be one and not the other.
Go to Sifu’s Notebook for 9 Powerful Reasons to Pay Yourself First
Primer: Who are Sifu & Ronin
Episode 28: Ronin Running on Empty
Ronin: Sifu, I got paid today. And by ‘got paid,’ I mean the money came in and then left faster than I can finish this bag of BBQ chips. Need help, bro!
Sifu: Woah! Slow your horses, Hoss. Where exactly is all your money going?
Ronin: Well, I upgraded my iPhone, so had to pay for that. Then I went to dinner like 10 times last month, so gotta pay the credit card bill for that. Bunch of other small things that just emptied the rest of my account.
Sifu: Yowza! The key to financial harmony lies in paying yourself first. Clearly, you’re not doing that. You seem to be living paycheck to paycheck with your recent spending habits.
Ronin: Oy! Guilty, as charged Judge Wapner.
Sifu: Paying yourself first means saving a portion of your income before paying anyone else. It’s how you ensure you’re prepared for the future.
Ronin: Future Ronin thanks you for the advice, but Present Ronin needs this stuff. And snacks. Let’s be real, my man!
1. Ensures Consistent Savings
Sifu: When you pay yourself first, you ensure consistent savings. Imagine each penny saved as a seed, growing steadily into a towering forest of financial success.
Ronin: Consistent savings? I’m consistently not saving. My bank account is more like a bonsai tree—tiny, fragile, and needs constant care and feeding. But I’m too busy feeding my insatiable appetite for restaurant chow and cool tech.
Sifu: Consider your savings as the water, #1. Without it, any tree will wither, and perhaps even die. That little tree will never grow to be the monster mighty oak you need for early retirement.
Ronin: Ai-yah! Dreams of early retirement at the beach starting to sink …
Sifu: Don’t give up, son. It ain’t over ‘til it’s over!
Ronin: OK, Lenny Kravitz! Let the fight continue…
2. Prioritizes Long-Term Goals Over Short-Term Wants
Sifu: Paying yourself first forces you to prioritize long-term goals over short-term wants.
Ronin: Boss, it sounds like you’re telling me I’ve got to ditch my VIP membership to the ‘Live It Up Now’ club. But YOLO is my middle name!
Sifu: The real battle is with your impulse buys—and future-you is counting on you. Are you going to defend Future Ronin?
Ronin: My dreams just left me a ‘get back to work’ memo. Time to buckle down and hope muscle memory for battle kicks in for this whole ‘work’ situation.
3. Builds Wealth Through Compound Interest
Sifu: Paying yourself first allows you to build wealth through compound interest. It’s the magic of money multiplying over time.
Ronin: Ah yes, compound interest. Heard that Einstein might have said that it’s the “8th wonder of the world”. If that’s the case, it must be true!
Sifu: I would never bet against The Light Speed Legend – he’s def the man.
Ronin: Fact.
Sifu: It’s real, Ronin. The earlier you start, the more your money works for you. Math doesn’t lie.
Ronin: Good one, bossman!
4. Creates a Buffer for Emergencies
Sifu: When you pay yourself first, you create a shield for when the shit hits the fan. You know – that emergency fund we spoke of. That fund will ensure that one shitty day doesn’t turn into a month-long prison sentence in hell.
Ronin: Me no like shit, so this one is a must!
5. Supports a Frugal Lifestyle
Sifu: Paying yourself first encourages a frugal lifestyle, one where you value what you have and live within your means.
Ronin: Frugal, huh? Is that just a fancy word for ‘cheap’? Because I’m not ready to become the dude that argues over expired coupons.
Sifu: Frugality is about balance, not sacrifice. It’s choosing wisely, not living without.
Ronin: Hmmm. Ok Wise One.
6. Enables Early Retirement
Sifu: Paying yourself first also enables you to retire early. Imagine a life of freedom, where you no longer have to work for money.
Ronin: So I get to retire early? And just sit around drinking tea and meditating all day like you, but in my beachfront pad, right boss? Count me in!
Sifu: Hahaha. Thought so, #1. But you must start now to build that future.
7. Reduces Reliance on Debt
Sifu: When you pay yourself first, you reduce your reliance on debt.
Ronin: Debt is like that one friend who always borrows your stuff and never returns it. I hate that guy.
Sifu: Ha! Then stop inviting him to your party, dude.
8. Allows for Strategic Investment Opportunities
Sifu: Paying yourself first also creates opportunities to invest strategically when they arise.
Ronin: Ah, yes. Investing in my dreams, which include owning a pizza oven and a beachside hammock. Very strategic, boss!
Sifu: Oh boy! Your investments should grow your wealth, not just fulfill your cravings, you hungry dumpkopf.
Ronin: Why not both, Sifu? Pizza AND profits.
Sifu: Ok ok. I’ll concede … this time!
9. Reinforces the Habit of Financial Discipline
Sifu: Pay yourself first, and your bank account will thank you. Today’s discipline is tomorrow’s freedom.
Ronin: Alright, I’ll pay myself first. But if I don’t become a millionaire by next week, I’m sending you my credit card bill.
Sifu: Ha! If only. If you could fast forward to your future, I’m pretty sure you would be pretty damned glad you did this paying yourself first business. Beach life is awaiting you – eyes on the prize, remember? Focus!
Ronin: Like a laser, Sifu. Speaking of pizza, Margherita slices on you, big guy. My bank is down to a buck fifty.
Sifu: A hundred and fifty dollars?
Ronin: Decimal place, boss. $1.50.
Sifu: Doh!
Sifu’s Notebook
9 Powerful Reasons to Pay Yourself First
The concept of “paying yourself first” is often hailed as one of the most fundamental principles of personal finance, and for good reason. It’s a simple, yet powerful strategy that can drastically change your financial trajectory. But when it comes to FIRE, paying yourself first isn’t just a recommendation—it’s a necessity.
What Does It Mean to Pay Yourself First?
At its core, paying yourself first means prioritizing your savings and investments before any other expenses. Instead of waiting to see what’s left over at the end of the month, you set aside a portion of your income right off the top, directing it toward your financial goals. This approach ensures that you’re consistently saving and investing, regardless of your spending habits.
Think of paying yourself first as the financial equivalent of putting on your own oxygen mask before helping others. By securing your financial future, you’re better equipped to handle life’s uncertainties and to achieve your long-term goals.
Example: Let’s say you earn $5,000 a month. If you decide to pay yourself first by saving 20%, you’d set aside $1,000 immediately after getting paid. The remaining $4,000 would be used for bills, groceries, entertainment, and other expenses. This way, your savings are guaranteed to grow, even if your spending fluctuates.
Why Paying Yourself First is Crucial for FIRE
The FIRE movement is built on the idea of financial discipline, long-term planning, and aggressive saving. Here’s why paying yourself first is a cornerstone of this philosophy:
1. Ensures Consistent Savings:
What It Means: Consistency is key to building wealth. By paying yourself first, you establish a habit of regular saving and investing, which is essential for reaching financial independence.
Why It’s Important: Without consistency, your path to FIRE can become unpredictable. The more consistent you are with saving, the faster your investments will grow, and the closer you’ll be to retiring early.
Example: Imagine you save $1,000 every month. In 10 years, you’d have $120,000 saved, not including interest or investment returns. This consistency adds up over time, making FIRE attainable.
2. Prioritizes Long-Term Goals Over Short-Term Wants:
What It Means: Paying yourself first shifts your focus from immediate gratification to long-term financial security. It forces you to think about your future needs and goals before spending on non-essentials.
Why It’s Important: In a world filled with consumer temptations, it’s easy to spend impulsively. Paying yourself first helps you resist these urges, keeping your long-term goals in sight.
Example: Instead of splurging on a luxury vacation, you allocate that money toward your investment portfolio. While you may forgo some short-term pleasures, your future self will thank you.
3. Builds Wealth Through Compound Interest:
What It Means: The earlier and more consistently you save, the more you benefit from compound interest. Paying yourself first allows your money to grow exponentially over time.
Why It’s Important: Compound interest is one of the most powerful tools in wealth-building. The more you save and invest early on, the greater your financial gains will be in the long run.
Example: If you invest $1,000 a month at an average return of 7% annually, you’d have nearly $240,000 in 10 years. Over 20 years, that amount would grow to over $600,000, thanks to compound interest.
4. Creates a Buffer for Emergencies:
What It Means: Life is unpredictable, and unexpected expenses can derail your financial plans. Paying yourself first ensures you have a safety net in place, so you’re prepared for emergencies.
Why It’s Important: Having an emergency fund is crucial for maintaining your financial independence. It prevents you from dipping into your investments or taking on debt when unforeseen expenses arise.
Example: If you’ve been paying yourself first and saving consistently, a sudden car repair or medical bill won’t force you to sell off assets or max out credit cards. Your emergency fund will cover it.
5. Supports a Frugal Lifestyle:
What It Means: Paying yourself first naturally encourages frugality. When a significant portion of your income is earmarked for savings, you’re more likely to be mindful of your spending.
Why It’s Important: Frugality is a key component of the FIRE movement. By minimizing expenses, you can save more and reach your financial goals faster.
Example: If you’re used to saving 30% of your income, you’ll learn to live on the remaining 70%. This lifestyle adjustment can help you avoid lifestyle inflation and keep your expenses in check.
6. Enables Early Retirement:
What It Means: The ultimate goal of FIRE is to retire early, and paying yourself first is the most effective way to make that happen. By consistently saving and investing, you can build a substantial nest egg that allows you to leave the workforce years ahead of schedule.
Why It’s Important: Early retirement isn’t just about leaving your job; it’s about achieving financial freedom. Paying yourself first accelerates this process, giving you more time to enjoy life on your terms.
Example: If you start paying yourself first in your 20s or 30s, you could potentially retire in your 40s or 50s, depending on your savings rate and investment returns.
7. Reduces Reliance on Debt:
What It Means: When you pay yourself first, you’re less likely to rely on credit cards or loans to cover expenses. This reduces your overall debt burden and keeps your finances on track.
Why It’s Important: High-interest debt can be a significant barrier to achieving financial independence. By avoiding debt, you keep more of your money working for you, rather than paying interest to creditors.
Example: Instead of financing a new car, you save up and pay in cash, avoiding interest payments and keeping your monthly expenses lower.
8. Allows for Strategic Investment Opportunities:
What It Means: When you consistently save and invest, you’re better positioned to take advantage of strategic investment opportunities as they arise. Paying yourself first gives you the financial flexibility to act quickly when opportunities present themselves.
Why It’s Important: Opportunities to invest in high-growth assets or undervalued markets can significantly accelerate your journey to FIRE. By having capital readily available, you can make the most of these opportunities.
Example: You’ve been saving diligently, and when a promising real estate investment comes up, you’re able to seize it without hesitation, boosting your passive income streams.
9. Reinforces the Habit of Financial Discipline:
What It Means: Paying yourself first is a habit that reinforces overall financial discipline. It helps you develop and maintain other positive financial behaviors, such as budgeting, tracking expenses, and setting financial goals.
Why It’s Important: Financial discipline is the backbone of the FIRE movement. Without it, achieving early retirement and financial independence becomes much more difficult.
Example: By consistently paying yourself first, you’re more likely to stick to your budget, avoid unnecessary debt, and stay focused on your long-term goals.
