E7: Paying Yourself First

In this episode, Nate and Holly offer the keys to escaping financial bondage. As many Americans become slaves to debt, our hosts reveal how you can separate yourself from the herd’s mentality by paying yourself first and having your money work for you.

Listen in as Nate and Holly also touch on:

  • The benefits of living on less than you make
  • How financial freedom can lead to financial success
  • Budgeting around your savings
  • Why you should direct deposit to yourself

 Episode Takeaways:

There’s not much difference between being a slave to one master or many. That’s what most people are doing; they’re walking around in financial bondage.

So one of my keys is to budget around your savings. That’s what we mean when we say pay yourself first. And as Holly said, automatically move money, almost like a bill, that gets into a place you’re not going to just go and spend it.
Normally the people who spend and then save are working for the people who save and then spend. There’s a golden rule out there—we know the common one, but it’s also “Those who have the gold make the rules.”

It doesn’t take that much time to sit down in your life on a daily basis and say what can I cut out that is a need versus a want? Or what am I paying for that I’m not using? Such as cable TV or gym memberships. There’s all kinds of things out there that we pay for that we don’t necessarily need.

Understand that even though that’s a premium payment, you’ve now paid yourself by making that premium payment.

Without paying yourself first and living on less than you make, if you spend every dollar, you’ll never be financially free.

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Podcast transcript for episode 7: Paying Yourself First

Nate: In this podcast, we’ll discuss why paying yourself first is the key to financial success and how you can start doing it today. She’s Holly, and she helps people find financial freedom.

Holly: And he’s Nate, and he makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered. Episode 7.

Nate: So today we’re going to be discussing one of the key issues in your personal financial walk, that I can think of, and it’s the most fundamental thing you need to do to be successful. And that’s this idea of paying yourself first. Holly, when most people walk around in the world, when do they get paid?

Holly: Most people, when they get paid, they take their money, and either it’s direct deposited or they get that paycheck, and they cash it and they go and pay everyone else. They pay the people rent, if they’re renting their house, or the mortgage people. They pay the car people, the gas people. They may have credit card bills or utility bills. So they take care of all the bills first before they ever start to think, “Oh wait. Maybe I should have kept some of that money for myself.”

Nate: Right. In other words, everyone is paying themselves last. For the most part, in America today, and you can see that with our pretty low savings rate, that really everyone as they’re getting paid, they’re sending their money out to everyone else, and they just hope that there’s something left at the end of the month for them. That’s not a good system to guarantee success. Wishful thinking.

Holly: And, Nate, most of the time what happens is they get to the end of the month and there’s no money left to pay themselves. So they have to start tightening up on either what they were going to spend, or they don’t go and do those things they wanted to do. Or what they do is get into credit card debt. Or they start charging things, hoping that next month they have a better month than this month.

Nate: And we’re all caught up in that life. The world tries to push us into that mold, where that’s what we do. They want us to spend, spend, spend, so that we do get into that credit card debt and we do get caught without any money. And we’re always a slave. And that’s what we talk about with people. I know, Holly, you do as well as I. One of the things I tell people is that if there was a piece of paper sitting in front of you and it said if you signed it, you would be my slave, I really don’t think you’d be interested in signing it. Probably not a good idea. I’m a nice guy, but you probably don’t want to be a slave to me. I don’t blame you. But if we assumed that you did, then everything you produced would belong to me. But if we take a look at what you’re doing in the real world, most of the time, you’re out there working, earning an income, and the food people get it, the house people get it, the car people, the credit card people, the tax people, the utilities, the entertainment … in other words you did all the work, but you don’t have any of the money. And there really isn’t much difference between being a slave to one master or many masters. And that’s what most people are doing—they’re walking around in financial bondage.

Holly: What they don’t understand is that as long as they’re in that financial bondage all they’re going to keep doing is work harder, trying to make more in order to get out of that debt. Basically, that hamster that’s spinning on the wheel. They keep working harder, spinning it faster, hoping it produces more, and then at the end of the month they have a little bit extra for themselves. And they discover that, what happens, the money goes somewhere else, and they still don’t have anything more than they had when they were making less.

Nate: It doesn’t really matter how much you make. We’ve talked to plenty of people who make a ton of money and yet have nothing. And we wonder where did it all go? It’s because they haven’t bought into this idea of paying yourself first. That’s what this whole webinar is about. We’re going to go into why it’s extremely important to do so, how to start paying yourself first if you haven’t been caught up in that, and then where the money should go as you’re paying yourself and learning to live on less than you make. Before we get into that, we’ll take a quick moment to get a word from our sponsor, Living Wealth, and then we’ll get back into it.

Holly: Now the “why” we’ve somewhat answered in regards to why you pay yourself first is so that you have something to start off with versus waiting till everyone else gets that money. You’ve worked for that money. You’ve earned that money. So you should have something first versus giving that money to everybody else. Would you agree?

Nate: Right. And we actually answered a lot of the “why” … the first “why” is because you don’t want to be a slave. Slaves work and end up with nothing. That’s just the way it is. They work, and someone else gets all the profits that they generate. You don’t want that to be you, where you’re doing all the work, but everybody else is getting all the money. And that’s the only reason to work is so that you have something left over. The other reason I had in mind is that it’s truly the only way, the only path, to financial freedom. If you can’t learn to live on less than you make, it doesn’t matter how much you make, you’ll always have to be working to earn your income instead of having your money working for you.

Holly: And that’s really key there—that financial freedom is what allows you to also have financial success. And Nate pointed out something key there is that one of the things in paying yourself first is learning to live on less than what you make in order to be able to pay your bills but pay yourself as well, so that everybody else doesn’t get the money. Basically you’re not a slave to many masters.

Nate: One of the things people need to think about is that we all make our payments. What’s the number one reason why most people don’t save money? The number one reason why is because they don’t have to. If we had to, we probably would. But because we don’t have to, we don’t. In other words, we pay our mortgage because we have to. We pay our car bill, our utilities, because we have to. The one thing we don’t have to [do] is pay ourselves. There’s no one out there forcing us to pay ourselves. And that’s the number one reason why we don’t. So one of the first things you should ought to try to do is make a payment to you. Because we’ll know we’ll make that payment. We’ll get into that more. As we said, Holly, the only way to financial freedom is to learn to live on less than you make. To start taking your budget and directing it around your savings. And not directing your savings around your budget. And that gets us into the next point. We have the “why” you should—it’s really the fundamental foundational thing everyone should be doing is kicking this idea that I need to pay myself last … and save around my lifestyle. Never really works. The next thing we want to do is “how,” some ideas of how, if you’re not paying yourself first or if you want to do more, how do we make that happen? Holly, what are some ideas that you have on how to pay yourself first? How to really start adopting this principle and living on less than we make in a world that’s trying to press us to spend everything we’ve got?

Holly: One of the mindsets is changing your mind to understand that you were the one that worked to earn that money, so you have to have that belief that you should be paying yourself something … and it’s really determining for you on the how of how do I do that. Is it taking your paycheck, and when you get that paycheck, setting aside, in my viewpoint, a certain amount of money? How much money are you worth per hour? I do a real simple thing with clients and ask “Are you worth $2.50 an hour?” And everybody says, “Yes, I’m absolutely worth $2.50 an hour.” Yet how many of us save $100 a week then? We pay ourselves $100 a week. That’s roughly $2.50 an hour, 40 hours in a workweek. That is $100 a week, and many of us don’t even have $100 left at the end of the month. So the “how” is really determining how you’re going to do that. It means taking that money out initially once you get a deposit. The important key here is we often have our bills that are automatic withdrawals. It’s so easy to automatically set up an automatic withdrawal to yourself once that check is deposited, and it goes to you versus someone else.

Nate: I think that’s great. You want it to be automatic. I totally agree with that; that’s important. I like thinking in the hourly term, as you said. Thinking in the hourly and daily, am I really worth $2.50 an hour? That’s a great starting point. And if you are, then say okay I can set that aside as $20 a day or $100 a week, as you said, Holly, that we really ought to be setting aside as a minimum. And if you start thinking in hourly rates, and if you start thinking of it on a daily basis, I think it will make it a lot easier. One of the things I had thought of as well is to budget around your savings. Don’t save around your budget. And remember this is Dollars and Nonsense. We don’t like following the herd. The herd’s mentality is to spend, spend, spend and hope that there’s money left over at the end of the month. In other words, they’re saving around their budget. They want to spend first and save second. And I can promise you, if that’s you, that’s an issue because then, essentially, there’s never any inclination in your mind to actually save because we’d rather have the things of this world in our hands right now. And I’ve seen it time and time again. So one of my keys is to budget around your savings. That’s what we mean when we say pay yourself first. And as Holly said, automatically move money, almost like a bill, that gets into a place you’re not going to just go and spend it. So then you’ll only have X amount to spend, and you won’t go over that limit. Or at least we’re hoping that as we’re getting this mindset shift that you don’t.

Holly: Nate, everyone has a set amount in their brain that they’ve been taught, “Oh I need to be saving 5% of what I’m making, or I need to be saving 10%.” And how often in your brain or your daily life do you say, “Oh I’ll do that next month. Instead of saving the 5% this month or this week, I’ll do that next week. Or I’ll do that next month.” And then that next month rolls around, and we didn’t do it that month, so we’ll do it the month after. And when it’s automatic, it’s not even something that you have to do. As soon as your check is deposited, it automatically goes in somewhere else to go be saved that’s how you’re setting up saving first, not budgeting around what you can afford. But really this is what I want to save. And it does teach you what Nate said, to live on less, just by doing that simple thing. But if I was working with Nate and he was working with me, and we make the exact same money, if I’m the one who spends and then saves, Nate’s always going to be ahead of me. Wouldn’t you agree?

Nate: Definitely. Because, as you said Holly, normally the people who spend and then save are working for the people who save and then spend. There’s a golden rule out there—we know the common one, but it’s also “Those who have the gold make the rules.” And if you don’t have any gold, you won’t be able to make any rules. You’re going to be powerless. That’s why if we can’t get this down, then you’re essentially working for the banks because if you don’t pay yourself first, then you probably won’t have much left over, which means anytime you need to go on vacation, or need to buy a car, or have a wedding, or education, you’re going to have to go to someone else and get their money and pay them back on their terms. So it’s extremely freeing to start paying yourself first, living on less than you make, building up a pool of money to work with so you don’t have to be in bondage to anybody else.

Holly: And that “how” is really important. How to do it. If you’re not doing it automatically, then that’s one of the biggest keys. But also you have to, in the “how,” determine exactly how much you are going to save and what is that dollar amount or that percentage amount you’re going to save. Because if you don’t know that, and you haven’t answered that question, then all you’re going to be doing is trying to save and not knowing why you’re doing it. There’s no path.

Nate: There’s a book out there called The Richest Man in Babylon. That’s a great book encouraging people to live their life and understanding this whole paying yourself first thing. I wanted to give one more thing real quick about the how to pay yourself first. A little bit of practical advice. You know, you say, “Nate, I have all these bills, and I don’t know how I can do it.” One of the things we help people do or suggest people do at times is go ahead and if you have car loans or mortgages or credit card debt and things like that, I would suggest (it depends on the situation) you can refinance your debt to a longer time period or just pay the minimum like on a credit card, or if you have a car loan or mortgage, refinance it to a longer period just to free up some cash flow. In other words, if you have a mortgage and you’re paying a 15-year, maybe you should try to refinance to a 30- year so that it frees up some cash flow that you can start paying yourself first. Or if you’re paying a whole bunch extra on a credit card, that’s great and I applaud you for it, but that’s no good to get out of credit card debt and spend all your time and energy getting out if by the time you’re out, you have absolutely no money and an emergency comes along and you have to swipe the card again. So one of the quickest ways to do it is to try to figure out ways to lower your payments on the car by refinancing or the house or pay the minimum for a period of time to free up cash flow so you’ll be able to start paying yourself first. And we can even use the money we’re building up to take over those other debts as we get enough. But the key is you have to start making it a part of your lifestyle. If you just keep saying, “Oh, I’ll pay myself first when I’m out of debt. I’ll pay myself first when the car loan is paid…” That’s the hamster wheel. It’s never going to happen. You need to start making a change today in order to make that happen.

Holly: Because what you’ll end up being, Nate, is cash poor and asset rich.
Nate: And you won’t even be asset rich. You’ll just be cash poor and have no debt.

Holly: Even with the credit cards, the key there is, hey you got out of debt, but guess what, it didn’t give you any cash for that rainy day. An emergency happens, and what you worked so hard to get out of, you’re now right back into because you had to put it back on the credit card.

Nate: That’s definitely a vicious cycle. One of the quickest ways to help is to think in terms of hourly and daily rates of saying, “Am I worth this—yes. I’m going to start setting aside every day. Every time I get paid or something like that. To budget around your savings not to save around your budget. Just save last like everyone else is doing. You can refinance to lower payments on different things or just pay the minimum to free up cash flow to get discipline to make this a part of your life. And the last one, real quick, maybe it’s time you took a look and started cutting out the unnecessary bills that you’re paying on that you never use, whether that’s cable TV…. I had a gym membership, and I found out I never went. There’s a place to work out for free right down the road for me anyway. And I said why am I still paying for this. Or magazine subscriptions. You can probably look at your budget and realize I’m paying for this, but I don’t ever use it.

Holly: It’s also addressing things as needs versus wants. There are basic needs we have to have versus our wants. Would some people prefer to go out to eat every meal—yes. Can they afford that—maybe no. Or even the gym membership, like you said, we never had a gym membership until we actually got paid to be reimbursed if we did a gym membership. And then we did that. But if we don’t use it, then why are we even paying for it?

Nate: I think you’re right. And it’s not like we’re saying scrimp and save and never do anything. But you’ve got to—especially if you’re not doing it now, at least consistently, if you’re not saving consistently—you need to figure out what works for you and how to do it and then get serious about it. Get serious about it to make a change.

Holly: Nate, I had a friend who was very much in this situation. A little story: she would go to Starbucks three or four times a day and get a Starbucks drink. So she bought a Starbucks maker so that she could make her coffee at home, and then she bought the little pods and stuff like that. But what she did is she bought it all, she left it all in the box, and she never used it. She still kept going to Starbucks. I was like: it’s as simple as you don’t have to cut out Starbucks out every day, maybe you only go three times a week or maybe you only go once a day versus three or four times a day. But she bought the stuff to not even go and then didn’t use it. If you’re not going to use it, go return it and at least get your money back for what you bought that you never intended to use or never opened up. Just because I’m so busy I don’t have time to do that. We’re all busy. It doesn’t take that much time to sit down in your life on a daily basis and say what can I cut out that is a need versus a want? Or what am I paying for that I’m not using? Such as cable TV or gym memberships. There’s all kinds of things out there that we pay for that we don’t necessarily need.

Nate: Really that’s mainly for those who are out there who have never paid themselves first. You’ve got to get serious about it and cut some things out; that’s the only way it’s going to happen. If you continually spend every dollar you get, it’s going to be a painful thing. So that’s how to pay myself first. There are a few mindsets you have to have and then some practical application things between refinancing, minimum payments, and cutting some things out that you know you never use. The last thing I really wanted to get into, Holly, as well, is where should I be putting this money that I’m paying myself first. It’s one thing to pay yourself first, but it’s another to move it into a place that works for you and has benefits for you, that can have your money work for you instead of you working and things like that. Holly, we know we’re big fans of permanent life insurance and using it as a bank. I think that is the best place to start paying yourself first in is a whole life insurance policy built for banking the way that we teach and the way that we do. Now why is whole life insurance such a great place to pay yourself first just in general?

Holly: I think, number one, the fact it can be automatic if you’re doing it monthly. You can do an automatic withdrawal. And it goes in there automatically. But number one it’s giving you a guaranteed growth rate. So you know that when that money’s going in there it’s a guaranteed rate that you’re going to receive annually. And that growth rate is tax-free. So that’s an added benefit as well. The fact that you’re able to put your money in, it’s able to grow, and it’s tax-free. The other key is that you can use that money. So not only can you put it in there and pay yourself, but then you can also use that money and it’s still growing at the guaranteed rate and it’s still growing tax-free. Plus the fact of that you also have, if something happened, a death benefit. That’s an added bonus, but really if you think of this life insurance policy as your savings account or your bank (the savings account out of bank, but it’s your bank that you own), who doesn’t want a guaranteed rate that’s better than the savings rate at any bank today? Who doesn’t want tax-free growth? Who doesn’t want to be able to use that same money they put in there and use it for other things?

Nate: Exactly. Those are my thoughts as well. Why it’s so good is that it’s almost like creating a bill for you, almost. I don’t want to think of it necessarily in that term all the time. It is something that you can have automatically moved in and that you can’t just see when you go into online banking, and say “Oh, I have money, I’m going to the nicest restaurant in town again or every single day or go to Starbucks four times a day.” Because it separates it from you in that way, and it’s automatic.

Just like you said, it gives you access to it, though. I think one of the reasons people are suffering is because they have retirement programs that lock money up, and they end up living paycheck to paycheck with a retirement program, and that’s when they get into the whole debt problem that we find ourselves in as a country because all your money is locked up. The bankers in Wall Street have all your money. And because you don’t have anything, you have to go into debt— credit card debt, car loans, mortgages—and start paying them interest, so they’ve essentially put you into bondage instead of the freedom that we’re trying to do. So that access is extremely important because now whenever an emergency comes up or a car repair needs to be done, you don’t have to swipe the credit card and pay outrageous fees and interest to get things done because you’ve been paying yourself first. It’s automatic. It’s accessible, which means we can use it. We can even use it to take over debt. We can actually use cash to get rid of the credit card, and the car loan, and the mortgage and things like that.

Holly: The key, too, is that often people say,“I’ll put it in a savings account in the bank.” And the savings account isn’t that high of an interest rate, but even with that that’s still taxable. You want to put your place somewhere where you’ve already paid tax on that money; this is after tax dollars. So really you want to put that somewhere where it’s growing tax-free. Sometimes even if it’s in a savings account, because it’s in that savings account and we can so easily go and use it or get it out, we go and take it out and never go and put it back in. It is accessible through the life insurance policy, but there is a little bit of a process, so sometimes we’re not so quick to go grab that money we just put in and take it right back out and go use it to buy that new dress or that new pair of shoes or “I want to go on vacation somewhere.”

Nate: Exactly. There’s a little more hoops than swiping your debit card or paying cash for something. Hoops isn’t necessarily the right word, but they get the picture. Essentially, it separates it from you, and it’s a perfect place as a foundation that money is getting moved into every single month or every single year that’s building a big pool of money for you; it’s going to be working for you all the time. That you can use to take over debt. You can use to even make other investments with it as it’s building up. But it’s definitely, I would tell everyone, the best place as you’re starting out because your money’s not locked up, you can use it, but there is some sort of separation, so psychologically it’s going to help you quite a bit in your quest to be financially free and to start living on less than you make when it’s something separated from your normal bank account that you’re so accustomed to spending most of the money that’s going in there.

Holly: And it is your account. That’s the other thing, Nate. Once you buy with a mutual company, a life insurance policy, you’re a shareholder. So that money has value; that policy has value. Understand that even though that’s a premium payment, you’ve now paid yourself by making that premium payment. And not only have you helped yourself with a guaranteed rate of growth, but you’ve also now become a shareholder in that company. So you have just as much of an interest as the person next to you that put that money in a policy. Versus when you go to the bank, do you really care about the other customers in the bank? Not really. It’s your account, and the bank’s going to make the money. At least this way you’re going to be making the money and not the bank.

Nate: There’s so much more we can take about on why policies work. I think we can both agree that it’s by far the best place for money to flow to, especially as you’re learning to pay yourself first, to live on less than you make, a new mindset … To wrap it up, the “why” is crucial because without paying yourself first and living on less than you make, if you spend every dollar, you’ll never be financially free. But if you were to pay yourself first, you’ll definitely be financially free, and it’ll happen before you know it as you start changing your lifestyle, per se, to actually accommodate this. Especially, if you’ve been living on more than you make, which happens quite a bit with credit card debt and things like that … it’s so easy to do it; it’s a trap. So we definitely got to get out of it. How to do it? There’s a lot of ways. Think hourly, think in shorter time periods that makes it more feasible, refinance if you need to to reduce payments that frees up some money to be able to start saving and paying yourself first and getting yourself back on track. You want to budget around your savings, not budget your savings around your spending because that’s never really going to work.

Holly: And not just refinance, but sometimes the refinancing even with the credit cards is consolidating them. And sometimes you’ll have to consolidate them to get that lower payment. But even [then] you have to start thinking that sometimes your best option is to consolidate.

Nate: That’s a great point. A lot of times consolidating can free up some cash flow. Then there’s the simple cutting out the unnecessary things that don’t make sense for you to keep paying for. Be serious about it; just close them out. Spend a Saturday looking at where money’s going and say, “I shouldn’t have this, I shouldn’t have that …” Then start building yourself a policy based on what you’d like to be paying yourself first with, to build something that will produce the freedom you’re seeking and be able to use it and with all the benefits that Holly had said. And if you haven’t been doing this, or you start doing it at a higher level, I can guarantee that things are going to change for you and that you won’t be in same situation that everyone else is in, the situation that the herd is in, that spends first and saves second. Any closing thoughts, Holly?

Holly: Yeah, I want to say in closing really the key is to get off that hamster wheel that we’ve talked about and free yourself up to be able to gain financial success and financial freedom. So get off that hamster wheel as soon as you can. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered. Get free resources and transcripts for this episode by visiting livingwealth.com/e7