Alexis Field | Chill Maadi

Why You Should Always Pay Yourself First

You’ve heard it over and over again: Pay yourself first. Why is this so important?

You’ve heard it over and over again: Pay yourself first. Why is this so important? First, it establishes good saving habits. If you continuously pay yourself first, despite whatever is going on in your life at that time, you will be much more likely to achieve your goals.

Second, the power of compounding. Sometimes called the 8th wonder of the world, the power of compounding is truly remarkable. The best way to explain this concept is to show you an example:

Person 1 invests $2,000 per year beginning at age 19 and ending at age 27. Person 2 invests $2,000 per year beginning at age 27 and continues to invest until retirement age. Assuming the same rate of return (10 percent) in each of the two examples, a person who invests early and for just eight years will have more money at 65 years old than someone who starts late and invests for nearly 40 years.

	Example 1:		Example 2:
Age	Annual Investment	Year-End Value	Annual Investment	Year-End Value
19	$ 2,000	$2,200	$ 0	$ 0
20	$ 2,000	$4,620	$ 0	$ 0
21	$ 2,000	$7,282	$ 0	$ 0
22	$ 2,000	$10,210	$ 0	$ 0
23	$ 2,000	$13,431	$ 0	$ 0
24	$ 2,000	$ 16,974	$ 0	$ 0
25	$ 2,000	$ 20,872	$ 0	$ 0
26	$ 2,000	$ 25,159	$ 0	$ 0
27	$ 0	$ 27,675	$2,000	$2,200
28	$ 0	$ 30,442	$2,000	$4,620
29	$ 0	$33,487	$2,000	$7,282
30	$ 0	$36,835	$2,000	$10,210
31	$ 0	$40,519	$2,000	$13,431
32	$ 0	$44,571	$2,000	$16,974
33	$ 0	$49,028	$2,000	$20,872
34	$ 0	$53,931	$2,000	$25,159
35	$ 0	$59,324	$2,000	$29,875
36	$ 0	$65,256	$2,000	$35,062
37	$ 0	$71,782	$2,000	$40,769
38	$ 0	$78,960	$2,000	$47,045
39	$ 0	$86,856	$2,000	$53,950
40	$ 0	$95,541	$2,000	$61,545
41	$ 0	$105,095	$2,000	$69,899
42	$ 0	$115,605	$2,000	$79,089
43	$ 0	$127,165	$2,000	$89,198
44	$ 0	$139,882	$2,000	$100,318
45	$ 0	$153,870	$2,000	$112,550
46	$ 0	$169,257	$2,000	$126,005
47	$ 0	$186,183	$2,000	$140,805
48	$ 0	$204,801	$2,000	$157,086
49	$ 0	$225,281	$2,000	$174,995
50	$ 0	$247,809	$2,000	$194,694
51	$ 0	$272,590	$2,000	$216,364
52	$ 0	$299,849	$2,000	$240,200
53	$ 0	$329,834	$2,000	$266,420
54	$ 0	$362,818	$2,000	$295,262
55	$ 0	$399,100	$2,000	$326,988
56	$ 0	$439,010	$2,000	$361,887
57	$ 0	$482,910	$2,000	$400,276
58	$ 0	$531,202	$2,000	$442,503
59	$ 0	$584,322	$2,000	$488,953
60	$ 0	$642,754	$2,000	$540,049
61	$ 0	$707,029	$2,000	$596,254
62	$ 0	$777,732	$2,000	$658,079
63	$ 0	$855,505	$2,000	$726,087
64	$ 0	$941,056	$2,000	$800,896
65	$ 0	$1,035,161	$,2000	$883,185
Less $ invested		($16,000)		($78,000)
		$1,019,161		$805,185
Money increased		64 fold		10 fold

Need I repeat it? Pay yourself first, and start early!

Tips to take care of your personal finances

When we talk about personal finances, we refer to the management of the economic resources you have, with an eye on future planning.

The financial risks, the goals, the savings instruments, and the net worth that you have available are the aspects that you must consider to organize your money.

Personal finances must be understood as a professional matter because we often make the mistake of seeing personal expenses as something of little importance. However, they are an area of our lives that we should tread carefully since our future depends on them.

The last thing we want is not to reach our goals or lose money in the face of any emergency, no matter how small.

But, how should you take care of your personal finances? Here are some tips to get you started:

➡️ Save and Invest Your Money

Saving is crucial for the conservation of one’s finances. One of the most effective ways to save is to keep at least 10% of your total income per month.

But, the key is also to invest. The money saved only keeps its value if the interest rate acquired is higher than the inflation rate.

Investing money is an excellent way to make your capital profitable and save it more effectively since it won’t lose real value with time.

➡️ Only keep assets that increase in value.

Most assets lose value over time, such as cars or appliances. To maintain your financial health so that the numbers do not get out of control, try to keep only those assets that increase their value.

These assets might be stocks, bonds, or other financial instruments or be subject to increases in price thanks to inflation. If we have one of these goods that increase in price over time, in the long run, if we decide to sell the good, we will make a profit.

Gold is an excellent hedge for inflation, to put a clear example. GLD is an ETF we normally recommend.

➡️ Use your credit card wisely.

Cards are a good financial resource if they are taken advantage of and used well.

Take advantage of your credit cards for those purchases that allow you to pay in installments without interest. For example, when buying some furniture for your home.

Try to look at the number of installments and the corresponding value and make sure that your personal finances allow you to assume that debt each month. On the other hand, we also advise you to learn to read the account statement, so you understand each of the concepts detailed.

The important thing is that you are regularly checking your expenses and available credit limits.

Never use your card as extra money, as it is a financing instrument that includes a price for using it (interest).

Getting Your Portfolio Back on Track

The recent market declines have been steeper and of longer duration than many expected, making it difficult to determine how to adjust your portfolio.

Should you leave it alone, hoping the market will quickly rebound to much higher levels? Or should you sell everything and put your money in cash accounts?

The appropriate answer probably lies somewhere between those two extremes. What you should do is thoroughly review your portfolio. Consider these tips when analyzing your portfolio:

Take another look at your financial goals.

Now it’s time to face reality. If your portfolio declined substantially in the past three years, it would probably affect your financial goals. Recalculate how much you need to save on an annual basis, based on your investments’ current value and a reasonable future rate of return.

Be prepared to readjust your goals. For many people, one of the most painful results of the market declines has been the realization that they are now going to have to delay retirement.

Set an asset allocation strategy for the long term.

The most basic investment decision you’ll make is how to allocate your portfolio among the various investment categories, such as cash, bonds, and stocks. You want to ensure your portfolio is diversified among various investments, so when one category is declining, other categories will be increasing or not decreasing as much. To decide how to allocate your portfolio, you’ll first need to come to terms with your risk tolerance.

Factors like your time horizon for investing and return expectations will also impact your decision. Once you’ve decided on an asset allocation strategy, you’ll need to adjust your current portfolio to get it in line with that allocation.

Thoroughly review each investment in your portfolio and decide whether you should continue to own it.

Some stocks will rebound from the recent market declines, while others may never rebound. If you think an investment won’t rebound or will take a long time to do so, you may want to sell it and reinvest in others with better prospects. It’s a painful thing to do since most investors have an aversion to selling at a loss. But it’s an important step to ensure your portfolio is on track going forward.

Also, make sure your remaining investments are all adding diversification benefits to your portfolio. Just because you own a number of investments doesn’t mean you are properly diversified. Often, investors keep purchasing investments similar in nature. That doesn’t add much in the way of diversification and makes the portfolio difficult to monitor.

Look for investments you’ll be comfortable owning for the long term.

It’s tempting to look for the biggest winners in investments and put your money there. In essence, however, you are chasing yesterday’s winners rather than tomorrow’s winners.

You need to keep in mind that the best-performing investment category will change from year to year. A better strategy may be to select a diversified portfolio of investments you’ll be comfortable owning for the long term, so you have some money invested in each of the major investment categories.

Use dollar cost averaging to invest.

If you’ve been investing throughout the market declines, you have probably been purchasing at lower and lower prices, making you wonder whether it makes sense to keep putting money in the market. The point of dollar cost averaging is to invest a set amount of money in a certain investment on a periodic basis. When prices are lower, you will purchase more shares than when prices are higher, following half of the investing principle of “buy low and sell high.”

But the most important part of dollar cost averaging is that it forces you to continue investing when you really don’t want to invest. In the long run, when and if the stock market rebounds, you will probably be glad you had the discipline to continue investing during this market downturn. (Keep in mind that dollar-cost averaging does not guarantee a profit or protect against losses.

Because it involves continuous investment regardless of fluctuating price levels, you should consider your ability to continue investing through periods of low price levels.)

Pay attention to taxes.

Taxes are probably your portfolio’s largest expense. Ordinary income taxes on short-term capital gains, interest, and dividends can go as high as 38.6%, while long-term capital gains are taxed at rates not exceeding 20% (10% if you are in the 15% tax bracket). Using strategies that defer income for as long as possible can make a substantial difference in the ultimate size of your portfolio.

Some strategies to consider include utilizing tax-deferred investment vehicles (such as 401(k) plans and individual retirement accounts), minimizing portfolio turnover, selling investments with losses to offset gains, and placing assets generating ordinary income or that you want to trade frequently in your tax-deferred accounts.

Review your portfolio at least annually.

You can’t just adjust your portfolio now and leave it on autopilot. You need to keep an eye on your portfolio in case market, or company situations require changes. By reviewing your portfolio annually, you’ll have an opportunity to make adjustments on an ongoing basis, which should prevent major overhauls in the future.