The Three Most Important Words in Personal Finance

We’ll be posting 100s of videos/podcasts over the next few years covering many subjects, including some quite complex ones. Your questions will be answered! But none will contain a more important teaching than this clip’s short, simple message. Please share.

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Pay. Yourself. First. Those three words deserve more weight than any other advice in all of personal finance. Pay. Yourself. First. You know, I’ve probably seen more financial plans than anyone in the country over the last 35 years and I remain convinced that using forced-savings techniques, taking some money off the top, before you have a chance to spend it, is the single biggest key to achieving one’s financial goals.

You can’t invest and take advantage of our most powerful ally—compounding returns—without savings. Save first. Spend the rest. Good. Spend first. Save the rest. Bad. It really is that straightforward. In a strange way, it’s unfortunate that such an important piece of advice is so simple. It tends to get trivialized, even dismissed.

Don’t make that mistake. I recognize that fighting off temptation out there isn’t easy. Most of us are weak and it’s natural to give in to societal, biological, psychological pressures and that leads us to overspend. Budgeting sounds great in theory, but seldom works in practice. Wants turn into needs.

Today’s concerns overwhelm tomorrow’s. “I’ll catch up next month” becomes our perennially unfulfilled promise. Pay yourself first! Ben Franklin taught us more than 200 years ago to do that using his tremendous wit. Now we’ve got behavioral economists all concurring it’s the way to go. Formal research supports it fully.

It works! Yet most people still don’t do it. I can’t tell you how frustrating that is. Payroll deduction, automatic withdrawal, pre-authorized chequing—I don’t care how you do it, just do it! Not when the basement is finished. Not after the next vacation. Not in months, when you’re hoping to finally get at your financial plan.

Now. Will you miss the money? Will your lifestyle decline? I don’t know. Maybe. Sure, a little. But not nearly as much as you would guess. Honestly. The vast majority of people who institute a forced-savings approach are amazed at how little change they notice in their consumption. Frankly, even if you do feel a bit of a pinch and have to cut back somewhere, hey, sorry, but I still haven’t discovered a way to set aside some money without, well, setting aside some money.

I’ve been very well treated by the financial media over the years. I really have been. However, there’s one criticism I do hear. “Oh, Dave Chilton. Yeah, he’s that barber guy who says the same basic thing over and over again—’pay yourself first.’”

Exactly. And I’m very proud of that.