If you’ve been reading about personal finance for any length of time, you’ll come across various tenets. One example is spend less than you earn (or alternatively earn more than you spend) – but we’ll cover that another day. Today, I’d like to focus on paying yourself first.
When you pay yourself first, you set aside some of your monthly income for the future before you pay your bills. Many times people actually consider themselves one of the debts they need to pay. It certainly sounds a little backwards. Let’s examine the psychology of how this might work.
My good friend Joe was an early adopter of the Apple Ipod. He couldn’t believe how much music could fit into 10 gigabytes of storage space. The other day we were talking and he’s said his 60GB Ipod is getting close to full. He has a little video, but not more than 5-10GBs. It turns out that this is a well-known phenomenon called Parkinson’s Law. Parkinson’s Law can best be defined as “the demand upon a resource always expands to match the supply of the resource.” Examples of this include “work expands to fill the time available” and “possessions expand to fill the space available for them.” If you ever run out of closet space, chances are you are a victim of Parkinson’s Law as well.
What does this have to do with paying yourself first? Everything. Parkinson’s Law can easily be applied to your money. In short, the demand for that money expands to match the supply. This “new demand” prevents many people from saving money and getting ahead. By paying yourself first, you are effectively hiding that money from yourself. Your supply of available money is smaller. This could help you budget better and live more frugal.
Give paying yourself first a try in 2008. I think you’ll find that you have a nice little nest egg before 2009.
Lazy Man has been a lender at Prosper since February 2006. His lending has been written up in the Globe and Mail, Canada’s largest national newspaper. He is the author of the personal finance blog, Lazy Man and Money. He enjoys watching Boston sports while sipping diet cola.