To create wealth you must make your money work for you.
You can start by paying yourself first.
The purpose of paying yourself first
One of the most important rules for building wealth is to spend less money than you make, so you can save the surplus. The surplus is not saved for sake of saving, but to invest that money. The money you invest, the principle, will then work for you to create more money in the form of capital gains, dividends, rent payments, etc. One of the methods of building the principle is by paying yourself first, a concept made popular by George S. Clason’s The Richest Man in Babylon.
Why you need to pay yourself first
Many people receive their paycheck and before they know it, the whole thing is gone. The money is spent on rent, car payments, cable/phone bills, credit cards, groceries, entertainment, and whatever else. Chances are if you wait until you pay all these items first, you probably won’t have anything left – you would have found a way to spend it.
That is why you need to pay yourself first. The best way to start is by taking a portion of each pay check and saving it BEFORE paying all your other expenses. Now George S. Clason recommends saving 10%, which is a good start. I believe that amount should be as much as possible, and should grow as you get better at budgeting.
Creating the surplus
I’d bet that many will say that they can’t afford to pay themselves first because their expenses already eat up all or more than each of their paychecks. There are two ways to solve this problem, either increase your income or reduce your expenses.
While your focus should always be on expanding your means, or growing your income, you still need to learn to live below your means in order your to create this surplus and avoid accumulating debt. Look at your current expenses, where can you make cuts? Maybe you can save money by bringing lunch into work, going out to eat less, leasing more affordable cars, not buying clothes and other toys that may have no use. Make a list of all your expenses and figure out how you can make room in your budget to pay yourself first.
Make it a habit
At first, you will have to make conscious efforts, including creating a budget, opening a new bank account, and actually paying yourself first. You will likely make better decisions about the way you spend your money and learn to live on the amount of money you have after paying yourself. If you stay disciplined after a few pay periods you will adjust to this new plan and it will become the new normal for you.
You can automate this process to make it easier on yourself. Deposit the amount you want to save automatically into your designated account through direct deposit. Or you can schedule an automatic transfer to occur when you are paid.