As you have no doubt worked out for yourself paying yourself twice is in itself just a stepping stone to financial success.
Let’s just quickly recap for new readers:
The likes of David Bach (The Automatic Millionaire) like to tell you that you needn’t do much more than ‘pay yourself first’ (i.e. save) 10% – 12.5% of your gross salary in order to live an idyllic life (well, at least retire well) … going so far as to call this “A Powerful One-Step Plan to Live and Finish Rich”.
The reality is that this is actually a dangerous financial strategy to pin your financial future on.
Whilst the idea of saving money is to be commended – in fact, saving is absolutely necessary – the sad reality is that you would need to pay yourself first 75% of your gross income, starting now and continuing for the next 20 years, just to maintain your current standard of living in retirement.
Clearly, my solution – which is to Pay Yourself Twice 15% of your gross salary – does little to bridge the gap.
Of course, it’s what you do with the money that counts:
I assume that your current ‘pay yourself first’ savings are going into some sort of employer sponsored, tax-advanatged retirement plan …
… which we already know cannot possibly be enough to support your current lifestyle in retirement, let alone set you up for that hammock in the Bahamas with free flowing Pina Coladas that you crave 😉
However, I do want you to keep your retirement fund going – and growing – because it is insurance, if all else fails.
But, it’s the “all else’s” that will make the difference between an austere retirement in 20 – 40 years or a certainly more memorable (and, very early) retirement with $7 million in 7 years … or a happy medium, if that’s more your speed.
And, that’s why you need to Pay Yourself Twice:
– Once to maintain this insurance policy, and
– The second time to build your investing war-chest.
If the power of compounding at bank to mutual fund rates of return (i.e. 4% – 10%) is not sufficient, then it stands to reason that you need to start investing at (much) higher compound returns.
This means building up a modest starting capital amount and ‘rolling the dice’ with higher risk / higher reward investments e.g.
A few minutes with a good compound growth rate calculator will (a) confirm how well your current strategy is doing against your desired retirement needs, and (b) tell you how deep into the above table you need to dive to bridge the gap.
It goes without saying – so, I’ll say it anyway (!) – that I hope that you all succeed with your investments, be they in stocks, real-estate and/or businesses. However, if you should fail … well, by continuing to Pay Yourself Twice, it won’t take too long to build up enough starting capital to have another go.
And, it might take one, two, five times before you are successful …
All the while, you have a 20 year backup plan (by also continuing to pay yourself first) just in case 😉