Pay Yourself First: Then What?

In my previous post on this subject I wrote about one of the most important habits to building wealth, paying yourself first. In short, you want to make sure that 10 to 20% of your income is going to a separate savings account as soon as you get paid. Is this enough though to make you rich?

Probably not. Paying yourself first is just the beginning. I have paid myself first for sometime now, and yes for such a simple idea it works amazingly well. The trap I used to fall into though is that once I had built up a sizeable sum, I would spend it on something such as a holiday. Now I would never suggest not taking holidays (in fact I plan to write about why you should be taking regular holidays) but spending your entire savings on such things as a holiday, car, plasma tv, etc will not make you rich.

What you need to do when you pay yourself first is use your savings to purchase assets. By assets I mean something that puts money into your pocket. What I do, and what I believe is probably the best option for people starting out, is to invest via a managed/ mutual fund. These usually have the benefits of:

  • Low cost of entry: I opened mine with as little as $1,000.
  • Regular savings plan: many funds allow you to invest on a fortnightly or monthly basis.
  • A wide selection of funds: you will find there is an endless choice of funds. You will be able to find one that suits your risk profile.
  • Funds cannot be accessed immediately: its not difficult to withdraw your funds, but usually there will be a 1 or 2 day delay from your request to when you receive your money. This means you are less likely to use your funds for impulse buys as you will have a day or two to think things over.

Mutual funds are a topic I will write more on another time, but for now I can assure you that they are a fantastic way to develop the habit of paying yourself first.

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