Setting 2017 Priorities: Pay Yourself First

What is paying yourself first? It’s the simple concept that paying your future self is as important as any of your current bills or expenditures.

There are two kinds of procrastination: The kind where you know exactly what you need to do, but don’t want to do it. It can be difficult to overcome. Another kind is when you have so many things to do that you legitimately don’t know where to start. If you suffer from the first kind, I’m with you, but I don’t necessarily have a lot of fixes for that one. If you suffer from the second, let’s try this: Find one top priority, and go after that.

Now, think about that top priority. Picture it in your mind. Is it ... paying yourself first? If not, maybe it should be.

What is paying yourself first? It’s the simple concept that paying your future self is as important as any of your current bills or expenditures. It means that saving and investing for your future isn’t an extra or an add-on: it becomes one of your key expenses. Because retirement may seem far off in the distance, the need to put aside money now may seem less urgent than paying your mortgage, your car payment, and your credit card bills. It may seem that way now, but it won’t seem that way as you get closer to retirement.

And here’s a simple truth: your retirement day is closer today than it was yesterday, and it will be even closer tomorrow. If you follow the concept of paying yourself first, and if you set retirement goals and strategies accordingly, you’re much more likely to have enough money on which to retire comfortably.

How do you do it?

Too many retirement “strategies” involve paying all of your current bills and day-to-day expenses, and then taking the “leftover” amounts every pay period or every month and perhaps socking some of that away for future use. This can be a particular challenge for a dentist who owns or shares a practice, because there is always the question of how much to include as earnings for yourself and what to reinvest in the business.

This can also be a challenge for dentists because of lifestyle creep, which is the tendency to spend more as we earn more. Lifestyle creep is a very real phenomenon and one that isn’t all bad. But one of the potential problems it raises is that even as your income improves, the “extra” funds you have at the end of each period may not increase. That means you could spend your years of prime earning setting aside only the bare minimum for your retirement years.

Paying yourself first means setting aside retirement investments as if they have as much urgency and utility as any of your current bills. As much as you may want to reinvest earnings from the practice back into the practice, you should strongly consider doing so only after you have paid both your current and future selves.

One way to do that is to have part of your paycheck deposited directly into a separate account -- either a retirement plan or your own savings account. This is especially true if you have a spike in revenue from the business or a raise if you work in a group dental practice. Or, say, if you pay off a car or finish paying off a student loan. Simply continue that payment, but to a separate bank account or investment vehicle. If you’re getting by just fine now with your current bills, any income you start to earn over and above that can painlessly be redirected to your future self.

There are many more strategies for paying yourself first that we’ll cover in future articles. The key concept is deceptively simple: You are as important as any of those other debtors.