Last week, I wrote about how I blew up my law firm to improve it, thanks to some lessons I learned reading “Rich Dad, Poor Dad” by Robert T. Kiyosaki.  I discussed one simple lesson:  Pay Yourself First.  I then explained how I applied it to running my law practice and the changes I’m making now.

Pay Yourself First has an even greater effect on debt and wealth.  Simply put, Pay Yourself First means just that.  Make sure you pay yourself a reasonable salary, save for retirement and look out for Number One before paying others such as employees, creditors, vendors, etc.  Otherwise, you might never get around to paying yourself. 

Don’t believe me?  When was the last time you actually set aside money for your retirement or a “rainy day fund” before going shopping for groceries or filling up the gas tank or eating out.  If you can remember when, this blog isn’t for you.  But, if you’re like most people, the idea of setting aside precious money before you spend it on what most would consider required bills and other necessary expenses, you know what I mean. 

So, here is what I started doing in recent months.  Instead of worrying about how I was going to pay the bills (business and personal), I immediately maxed out my 401(k) contributions as well as a new health savings account (HSA).  These were easy ways to begin paying myself first and now it is done automatically with recurring contributions direct from my business accounts.  The best part is that I don’t even see the money but I know it’s there.  Between my 401(k) and the HSA, I’m setting aside roughly 20% of my pre-tax income leaving just 80% for everything else.  Before I did this, I can assure you that I was spending 100% of my after-tax income with nothing to show for it.

In addition to setting aside money in a 401(k) or HSA, you might also want to consider paying yourself first through contributions to your kids’ prepaid college tuition or 529 Plans, life insurance premiums, etc.  I already paid off my kids’ Florida Prepaid College Accounts and have yet to start 529 plans for them but that is on my list of things to do. 

By funding these accounts, I have assured myself that I will not play second fiddle to any other expenses.  Applying “Pay Yourself First” to debt is a huge but simple concept.  For many people, the question of saving for retirement (Pay Yourself First) or paying back debt (Pay Yourself Later or Never) really doesn’t come up.  The middle class has been brainwashed to believe that you must first pay your creditors with every last penny and then and only then should you think about your own wellbeing and retirement.  That is insane because that day never comes, does it?  Creditors want you to pay your debt back first even if you are left eating ramen noodles during your retirement years.  That’s the problem.  Not the noodles.  They taste just fine.  But, heading into retirement debt free and with no savings is not the solution.  The older you are the more important this lesson is.

Plus, another amazing thing happened as I started implementing these changes.  I found that not only was I able to start saving for retirement but I also had more money to pay down debt.  You may remember that I had roughly $25,000 in unsecured debt.  Today, I owe just $9,500 and most of that is to the IRS and my divorce attorney.  It’s strange but by focusing on myself and ways to cut out the fat in my law firm I was able to free up money to pay down debt faster than I thought I would or could.  As a result, I expect to have all of my unsecured debt paid off in the next few months and still eat more than ramen noodles.  Remember, I have a thing for Banana’s Foster.

Yes, my annual income is larger than most and my personal “nut” (i.e., monthly expenses) is relatively low due to having no car payments, for example.  I proudly drive a 2002 Lexus ES300.  It has more than 145,000 miles and runs great.  Potential clients ask me why I don’t drive a new, more expensive car but they miss the point.  Having the freedom to buy a new car if I want is more important to me than actually having the new car.  What you do with the money you have is far more important.  By paying myself first, everything I do from saving for retirement to paying down debt becomes second nature.  For me, it’s coming at a faster pace and that makes me want to keep the momentum going.

I haven’t even mentioned my mortgage debt.  I will save that for next week’s blog.  As most people know, housing expenses typically make up the largest chunk of a household budget.  Some say it should be no more than 31% of your gross income.  I would disagree.  That is too much, especially if your house is underwater and no longer your biggest asset.  More on that next week.

For now, here is my latest status report:  [220 lbs, -$9,500, 8]. I’m in a better mood because my new employee actually showed up to work today.  You know what they say—half of life is just showing up.  I’m glad she did.  So far, so good.

Until next time, Pay Yourself First or, as I tell potential clients:  Repay less.  Live again.