Pay Yourself Twice!

It is commonly taught that in order to build wealth, you first need to save; and, the best way to save – so common financial wisdom says – is to pay yourself first.

Investopedia (the online investment dictionary) explains Pay Yourself First:

This simple system is touted by many personal finance professionals and retirement planners as a very effective way of ensuring that individuals continue to make their chosen savings contributions month after month. It removes the temptation to skip a given month’s contribution and the risk that funds will be spent before the contribution has been made.

Regular, consistent savings contributions go a long way toward building a long-term nest egg, and some financial professionals even go so far as to call “pay yourself first” the golden rule of personal finance.

Whilst certainly better than the other 99% of the population who don’t even bother saving anything, paying yourself first doesn’t go far enough:

Never mind underestimating what it costs to live a reasonable lifestyle, realize that the old “retire a millionaire’ ideal is no longer adequate; this is largely because of inflation i.e. over 40 years, you will suffer roughly two doublings in the cost of living.

Another handy way to think about this is to think of your retirement date & financial target:

Think of a ‘number’ … the amount that you think is reasonable to aim for in retirement, given the financial strategies that you feel that you can employ. Can you save $1,000,000 by your expected retirement date? Less? More?

Don’t guess; there are plenty of retirement saving calculators around to help you with this task …

1. If 20 years out, ask yourself: “would I be happy with living off no more than 2% of that number, each year?”

2. If 40 years out, ask yourself: “would I be happy with living off no more than 1% of that number, each year?”

If your answer is a resounding ‘yes’ then you are done … it looks like your retirement savings strategy will work.


Now, stop reading this $%@@# blog, it will make your head spin 😉

But, I’m guessing that the answer will be ‘no’ … then what?

Then, you have to face some realities about your current “pay yourself nothing” and “pay yourself first” and “no debt in my life” strategies:

– A million dollars in 20 years (= approx. $500k today) to 40 years (= approx. $250k today), is too low a target,

– 10% isn’t enough to save,

– 20 – 40 years is too long to wait,

– Your 401k – more importantly, the underlying investments – isn’t the right place for your money,

– And, you are probably under-leveraged.

Today, we’ll deal with the first issue:

If you have two reasons to save money (1. to pay down debt, and 2. to build your investment war chest), then it stands to reason that you should pay yourself twice!

But, most people pay themselves second, if at all.

From now on, I want you to concentrate on paying yourself twicebefore you spend money on anything else (other than taxes and social security); here’s how:

1. Pay Yourself Once: If you currently participate in an employer-sponsored retirement plan, then you should continue to do so, and

2. Pay Yourself Twice: You should save an additional 10% of your take-home pay – for now, this can be in an ordinary savings account clearly separated from your other funds.

If you do not currently participate in an employer-sponsored retirement plan or if you and/or your employer are currently contributing less than 5% of your gross pay into your retirement account, then you need to increase your pay yourself twice target to 15% of your take-home pay.

Of course, this is easier said than done: if you had 10% of your take home pay just lying around, by definition you would already be saving it …

… in other words, you are already paying yourself twice; if not, all of your take home pay is currently spoken for!

So, let’s start slow:

Step 1 – Could you save just 1%?

Take a close look at where your money is going: do you think you could find any spending areas where you can cut back enough to allow you to save just 1% of your take home pay?

If you are already saving – but less than the 10% / 15% Pay Yourself Second target – do you think you could find any spending areas where you can cut back enough to allow you to save another 1% of your take home pay?

[AJC: No need to start at 1% if you can find ways to save more; start at (or, adding) 2% or even more, but make sure that once you start that you never turn back … be realistically aggressive in setting your Pay Yourself Second target]

Step 2 – Wait 3 months and double it!

Over the next three months, perhaps by scouring the personal finance blogs on the internet, dedicate yourself to finding ways to double your savings rate i.e. if you started at 1%, after three months you should be saving at least 2% of your take home pay. If you started at 2%, don’t take your foot off the gas … double your savings to 4% of your take home pay.

Step 3 – Repeat

Keep doubling every three months until you reach 8% of your take home pay; three months later, save that 8% plus an additional 2% of your take home pay.

Step 4 – Almost there

What you do next depends on your Pay Yourself Second target:

– if you are already saving at least 5% of your gross pay in an employer-sponsored retirement plan (or similar), then you are done! Keep saving that 10% of your take-home pay.

– if you don’t participate in a retirement plan, or if you contribute less than 5% of your gross pay (including employer contributions), then you should keep saving 8% of your take-home pay plus you should concentrate on doubling the additional 2% every 3 months (i.e. 2% to 4% to another 8%) until you reach your combined target of 15%.

Step 5 – NEVER give up

Start today and never stop!

Unfortunately, as I’ve already pointed out, saving alone won’t get you to Your Number … it won’t even replace your current salary!

So, next time, I’ll help you decide what to do with your Pay Yourself Twice savings …

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10 thoughts on “Pay Yourself Twice!

  1. Adrian,

    I’m a little confused by this post. I agree that saving twice is a great idea. I always recommend saving both for retirement and to have some free cash for investments, such as property or equities. What I don’t get from your post is how this is going to convert a normal income into the kind of money that provides a luxury lifestyle.

    Also, the amount people can afford to save varies widely. People who don’t save will always say they can’t afford it. But, we both know that’s just an excuse. Some DINKS are grossing $250-500K and they will never save a dime. But, there are also single parents and single income families who are barely scrapping by and they really can’t afford to save 15%.

    I have been saving and investing for over 25 years and I am completely dedicated to the cause. I was saving when I supported a family of three on $21K per year. But, I could barely afford to save 5% of my net and was slipping into debt at the same time. Now, my kids are grown and I make a lot more money. So, it’s a piece of cake to save 20%. But, at my income level, that still isn’t going to bring me $7 million, even after 40 years.

    So, my questions is, what is the plan for most people to save $7 million in 7 years? Unless they make seven figures, have no expenses and live on a fraction of their income, I don’t see how it’s possible.


  2. “I always recommend saving both for retirement and to have some free cash for investments, such as property or equities.”

    @ Bret – I’m not sure that it’s even possible to ‘save’ for a decent retirement (let alone $7m7y) unless one invests ALL (not “some”) of their free cash in investments, such as property or equities 😉

  3. Pingback: The Pay Yourself Twice Wealth Strategy!- 7million7years

  4. Adrian

    I appreciate you won’t give advice.. I am just curious

    Can I just ask clarification about the strategy…I have just started a new job recently..and for the first time I have started paying into employers set up.

    I am paying 5 percent into my retirement account and my employer 13 percent… that is their top amount.

    Why do you not suggest I pay more into my retirement account as additional voluntary contributions?

    Should’t I stuff as much spare cash as I can into it? The other 10 percent you are talking about

    Is it because I would need access to the cash for other investment opportunities and the pension is just one strand of it.

    I suppose I could invest it into my online travel site as an example or do you mean us this new fund for stocks or property.

    I just want to be sure I am starting out on this new road correctly.

    Best Wishes


  5. @ Jackie – The reason why I don’t give personal advice (besides the fact that it’s illegal) is that I can’t possibly know all there is to know about you. However, in general, for people who have 10+ years to retirement (or their Date i.e. early retirement) it’s EXACTLY because they “would need access to the cash for other investment opportunities and the pension is just one strand of it” AND/OR they “could invest it into their [insert: business of choice] or … use this new fund for stocks or property”. It seems to me that you ‘get it’ so go with your gut 😉

  6. Adrian, thanks.. I know you can’t advise…I am not asking you to

    When you say invest 10/15 percent into employer 401k.. does that mean in total between me and them or

    10/15 percent from me.. plus their 13 percent.. can you see what I mean and why I need the clarity or does it depend on what I feel is right?

    My gut says leave things as they are and don’t put any more into the pension..

  7. @ Jackie – It ALWAYS depends on what you feel is right; but, I think 10% – 15% total (you + employer) is enough INSIDE the 401k with the rest more accessible outside. Their 13% is exceedingly generous.

    Interestingly, in Australia, where the ’employer match’ is government mandated around the 10% mark (actually, the employee need make NO contribution to get the full ‘match’), there has been a negative impact on retirement.

    The theory is that people are taking larger mortgages, because they feel that their superannuation (401k) payout will be able to pay off their mortgage. Of course, they then need to downsize, but into what? In many areas a new townhouse costs more than they can sell their established houses for … so, it’s onto the pension for them!

  8. Thanks adrian.. I agree, it is generous..the minimum I have to put in is the 5 attain their 13 percent.

    It seemed silly not to take it.

    As its a banking environment.. they also offer share match for tax free saving so I guess I ought to look at that as well.

    They offer upto 30.00 if I put in 30.00 as well.

    So its like extra salary you are forced to save.. which is not a bad thing really.

    Need all the help I can have now under my new living circumstances.

    Thanks again Adrian.. I love this site.

  9. Well done for making $7 million?

    I just happened to do some calculations and came up with the following; If you earn $100,000 per year and save 10% per year, it will take you 100 years to get to a million. Of course, this is without interest but the interest=risk will have to be quite high to reach this target in a very short time like 7 years.

    So you must either have had access to funds or take a huge loan so that you could use the levarage to build up your fortune or you are just telling us what you have as a gross asset and not your net asset (after loans are paid off)?

    You could instead advise your readers that by making a deposit for one new apartment every year of their working life, that they then rent out (using the 10-20% of their salary for the deposit), anyone could build up a portfolio of thirty apartments over a thirty year period and then start to sell one off per year during their retirement and hopefully the rent during the 30 years would then have covered to pay off for the mortgage on each flat.

    This would then be inflation proof and have a lower limit tax on the profits.

  10. @ Abundant – I may share the occasional idea, but I don’t suggest them as The Way To Make $x In z Years; I leave that to the book-floggers.

    I made my $7 mill. by a variety of investment strategies (primarily buy/hold real-estate), the key being taking good chunks of my business income (rather than spending it) … yes, leveraging hard (!) … and, buying well. No miracles there 😉

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