Pay Yourself First

I've been reading again. This time, it's a book by David Chilton called The Wealthy Barber. (Click on the title for more information on the book.) He gives a totally common sense method for getting not just financially comfortable, but downright rich on nothing more than your average middle class salary.

His secret: save 10% of your salary, putting it into bonds, mutual funds, or some other long-term savings plan that makes use of compound interest. Just think about it. The average income for a family of four is $36,000 a year. So saving 10%, after taxes, would be about $2,700, or just over $200 a month. If you start saving in your twenties, you'll have saved millions by retirement. Not that you'll never touch it until then. In Chilton's plan, this money will make you financially independent, able to handle job loss or any other emergency, but also able to afford to reach your dreams and have what you really want in life.

Sounds easy, right? Well for some, I'm sure it is, but it wouldn't be easy on my budget! I struggle just to pay my bills on time. Often there isn't anything left, let alone 10%. But Chilton says that's normal. Most people spend all their available income, even overspend using credit cards and loans. You have to pay yourself first, he says.

Now part of me wants to laugh. If I take 10% of my income and put it into savings, my famiy's bills won't get paid. But I know Chilton has a point. The only way to save is to set aside a portion of our income before the bills are paid. I may not be able to save 10%, but I can start with 1% if that's all I can spare right now.

Paying ourselves first is the main principle in long range financial planning. Being a family with only one income can leave you strapped financially over the long term. After years of "just making it," or worse, racking up debts to try to keep up with the Joneses, you may find yourself left with nothing (or less). By saving a percentage of your income, whatever percentage you can manage, you will be more financially secure.

So while the 10% solution will not work for some of us cash-poor, deep-in-debt families, the 3% solution or the 6% solution might just do nicely.

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