According to self-made millionaire and bestselling author David Bach, there’s “one, proven,easy way to get rich:” Pay yourself first.
What that means is simple, Bach writes in “The Automatic Millionaire”: “When you earn a dollar, the first person you pay is you.”
While not a revolutionary or particularly exciting concept, it works — yet most people don’t do it.
“What most people do when they earn a dollar is pay everyone else first. They pay the landlord, the credit card company, the telephone company, the government …” Bach writes, and at the end of the day, they pay themselves whatever is left over. He calls this strategy “positively financially backwards.”
How much should you aim to set aside? Rather than thinking about that figure as a percentage of income, Bach likes to think about it in terms of hours of your life: “You should be saving the equivalent of one hour’s worth of income each day.”
Say you earn $50,000 a year. That’s about $1,000 a week, or $25 an hour for a 40-hour week, so you should aim to save $25 a day. And don’t just put that money in a savings account — put it to work in a tax-advantaged retirement account, such as a 401(k), Roth IRA, or traditional IRA, where it will grow effortlessly over time.
If you’d rather think about savings as a percentage, one hour’s worth of income comes out to roughly 10% of your gross income, Bach says. “Unfortunately, most people don’t even come close to saving that much,” he writes. “According to the U.S. Department of Commerce, the average American saves well below 5 percent of what he or she earns. In other words, most of us work barely 22 minutes a day for ourselves.”
The key to upping your savings is to make it automatic — have your contributions automatically taken out of your paycheck and sent straight to your retirement account.
After all, “you can’t spend what you don’t have in your pocket,” Bach says.