Is “Pay Yourself First” Before or After Tax?

“When Dave says pay yourself first… is that from before- or after-tax income?”

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Ryan from Sudbury asked this great question and Dave gave his answer along with other insights around how things like pensions or employer matching factor in.

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Hello.

Hey, it’s Dave Chilton, the Wealthy Barber. Thanks for calling in. What’s your name and what’s your question?

My name’s Ryan. My question has to do with paying yourself first. So, um, when you say you should pay yourself first, you know, 10, 15% of your income, um, right off the paycheck, is that, you know, pre-tax? Post-tax deductions? Does that change if you have, like a pension plan?

Great question, Ryan. And you know, I’m amazed that I haven’t been asked this question thousands of times over the years, but I haven’t been. I’ve been intentionally vague on stage, especially about whether I mean 10 to 15% of gross or net. The typical rule of thumb is 10 to 15% of your net income, but my feeling was if I was intentionally vague and somebody thought I meant gross income, even better, they would save more.

And so I kind of always stayed away from giving specific examples because I wanted people to save more. Now you see, when you look at the math very closely, the industry and the math experts seem to have settled on, if you’re starting in your twenties, save 15% of your net income. That’s the number you most often hear.

I’ll be the first to admit that with housing costs where they are, with the cost of living where it is, it’s very difficult for a lot of young people to set aside 15% of their net income in long-term growth. But that’s the objective. And even worse news, by the way, is if you’re not starting until your mid thirties, early forties, et cetera, that percentage has to go up.

So this is a challenge, no doubt, but that is the goal. You made an excellent point built into your question. What if you have a pension at work? Well, that changes everything. I mean, that’s gonna provide you with a retirement income specifics, I don’t know. Not knowing you of course, but that has to be measured here.

Often you’re contributing to that pension, whether it’s defined contribution or defined benefit. That has to all be counted into this, and of course, with a lot of group RRSP’s, for every dollar you put in, your employer may match with 50 cents and a dollar, and you have to count that as well.

So again, 10 to 15% of your net income, certainly though affected by whether or not you’re a member of a pension plan and all the details around it.

Thank you. That was a, that was a great answer. Appreciate it.

Okay, thanks for calling in Ryan. Say hi to all the Sudbury people for me.

Will do. Have a great day.