There are two golden rules for creating wealth that stand out above all others. The first, and most important, is to Spend Less Than You Earn. The second is to Pay Yourself First (PYF). Under the PYF principle, you give yourself top priority when it comes to deciding how to spend your income. Pay Yourself First by transferring money into a savings or investment account before you pay your living expenses.
Wealth is built in one of two ways. You can either save some of your own income, or you can borrow other people’s money (from the bank) to invest in property or businesses. Even if you borrow to invest, it is still really important that you save and invest from your own income. If you can’t manage your own money well, how can you possibly manage someone else’s?
Paying Yourself First doesn’t mean Treating Yourself First. It’s not about spending money on things you want now; it’s about building up your assets so you can spend later on. However, this doesn’t mean you have to go without things you want. Once you have built up your assets, they will produce additional income which you can then freely spend while keeping your assets intact to produce even more income. For example, instead of buying a $35,000 car now, you can use the $35,000 as a deposit on an investment that produces enough return to pay for a car over a period of time without having to touch your original sum. It’s like having your cake and eating too, although it can take a while for the cake to cook!
There is discipline involved with the PYF principle. Once you have transferred your income into savings or investment, you need to resist the temptation to transfer it back again and spend it.
Liz Koh is an Authorised Financial Adviser. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847. For free eBooks, go to www.moneymax.co.nz and www.moneymaxcoach.com