Saving Money – Paying Yourself First Really Pays Off

November 2, 2009 | Posted by Brad Chaffee

Are you big on saving money? If not, you should be.  Why?  Because of the financial security you will give your family for starters, among the many other reasons, but I will get to them later.  I’m sure you have heard the phrase, “pay yourself first.”  It implies that you should automatically save money from each paycheck before anything else—hence the paying yourself first part.

Americans as a whole are lousy savers, and the national savings rate for the U.S. in the third quarter of 2008, was in the red.  That’s right America—you were spending more than you saved and that is definitely a problem.

In March of 2009, the savings rate was reported as high as 5%, a definite improvement, but compared to other countries, falls short of impressive.

The Benefits Of Paying Yourself First?

Now you know that not saving is a problem, so let’s discuss the many benefits associated with paying yourself first.

• compound interest
• financial security
• being self-insured
• no need for debt
• reduced stress
• peace of mind
• building wealth
• emergency preparedness
• increased giving
• stronger marriage

As if that wasn’t enough, I’m sure if I spent enough time, I could add a half a dozen more. For now, I want to focus on the first one—compounding interest.

What is compound interest?

The simple definition:  interest paid on both the principal and on accrued interest.

Basically, it means that two plus two no longer equals four, but instead four plus any accrued interest.  Each year it compounds as your interest earned grows while you continue to add principle. (amount that you contribute) Not only is your principal earning interest but your interest is earning interest.  Common sense would tell you not to pass on an opportunity like that, so why is it that so many people do?

Perhaps you haven’t been to Enemy of Debt to hear me rant about it.  Or maybe you cannot seem to visualize the opportunity you are missing.  Just because you don’t understand it, doesn’t mean you aren’t missing out.

Fear not my self-reliant friends, I am here to help.  

The example below (courtesy of Dave Ramsey) is one of my favorite illustrations on how compound interest works.

**Some people pay too much attention to the rate of return Dave uses, but he likely uses 12% because he had investments that returned 12% or more at the time, and to show the overwhelming power of compounding interest with a higher rate of return.

For the record, some suggest you should realistically expect closer to 7-8%, but it doesn’t mean 12% or even 18% is not possible.  Do your research.

Pay attention to and compare:

• age that Ben and Arthur begin investing. (19 & 27)
• how many years they invested for. (8 & 39)
• total dollars invested. ($8,000 & $78,000)
• total savings at age 65. ($2,288,996 & $1,532,166)
• interest earned on investment. ($2,280,996 & $1,454,166)
• the difference: ($826,830)

That’s a HUGE difference!  Maybe you will think twice about passing up on paying yourself first to take advantage of compounding interest today!! Learn and grow your money!

photo credit

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Brad Chaffee is the Enemy of Debt, and a regular contributor here at the Self Reliance Exchange. Brad has also become debt free by paying off $26,076.75 in just 20 months. Learn more about Brad by reading his bio. You may also contact him here.

Categories: personal finance | Tags: compound interest, paying yourself first, saving money, self reliance | No Comments »