Hey guys, It’s Finance Fridays again, and I’m here to talk about the “Pay Yourself First” concept.

This should be a relatively short post, but still very important.

Stock Photo from: Pexels

What do you mean “pay yourself first”?

This is actually a concept in most, if not all retirement books/articles. Essentially, when you receive your paycheck, before spending even a penny of it on anything else, you set aside money for your saving/retirement.

If you already contribute to a 401k/403b or 457, then your money comes out of your paycheck automatically. You never had it and therefore it was never part of your budget.

Get it?

Well… how about this then?

You guys know I’m a sucker for a good meme. I felt this one fit the bill pretty well.

Isn’t this kind of like your post The Biggest Mistake of Your Life?

Yup.

I think that a lot of saving for retirement, curbing spending, and growing into your new salary comes from your ability to never have access to it.

Remember, what I said about Financial Advisors and AUM?

Rich doctors can “afford” to lose 1-2% of their net worth every year and not feel it.

Or what about Dr. Yoloswag and not putting away $18k his first half year as an attending?

That $18k first half year as an attending is worth $120k 30 years later in retirement. However, he’ll never know that because he doesn’t know about it. Ignorance is bliss.

Ignorance is bliss?

Yup.

Remember those “themes” you learned in high school? Ignorance is bliss is one of those themes which are used to make you construct an argument as to why ignorance is bliss (or not). For example, at my high school we had to write a paper about Flowers for Algernon and argue Ignorance is Bliss.

However, it holds true for both sides of finance/retirement.

You can be blissfully ignorant of the money you lost from paying AUM or from not saving $18k your first half year as an attending… however, the flip side is:

If you have money come out of your paycheck every month before you can spend it and allocate it to other things, then you are blissfully ignorant of this money you have.

The easiest example of this is what I described above, the 401k/403b and 457 coming out of your paycheck automatically. This should be automatic.

What else can you make automatic?

Well, remember I talked about 529s? You can and should make that automatic as well. How much you allocate isn’t as important as just starting. Then every few months, maybe you can afford to contribute more. It doesn’t have to be a crazy amount, just whatever you are ok with.

Here’s another hypothetical situation:

Let’s say you recently got a raise and your job now pays you an extra $500 a month (post-tax). There is no need to increase your lifestyle by $500 more a month. After you are aware of this new salary, why not just take the difference and move it into a savings account or CD and then take the money you saved for a trip. Remember I’m all about buying experiences and not things. Maybe take the family to Disneyland or Disneyworld or something.

Or:

Add the difference to the 529s for your kids.

Set it aside for the backdoor Roth IRA you kept forgetting to do.

Start paying your kids some money for their own Roth IRA.  (Just remember, it can’t be “normal chores”)

Just throw it into a Vanguard Index Fund.

Throw it at your student loans, pay them off faster.

Save it for a down payment on a house.

Throw it at your mortgage, pay it off early.

The long and short of it is:

Don’t just spend it.

Your lifestyle should be reasonably comfortable as a doctor. However, it is very easy to spend more money every month if you have access to it. You need to remember your Value Cost Ratio.

Will spending $500 more a month really provide a significant change in your lifestyle?

I doubt it.

TL;DR

Pay yourself first.

Can’t spend money that you never knew you had. (Think about it)

Saving for retirement should be automatic. You never had it and can’t touch it.

Once you establish a reasonable lifestyle as a doctor, there is little need to increase it.

I doubt spending more money will significantly increase your lifestyle (or your happiness).

Any extra money or increase in salary should be funneled into other avenues, as described.

Don’t just spend it. Buy experiences not things.

-Sensei

What do you think? Do you “Pay Yourself First”?

Ignorance is Bliss? Or not?

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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