The Simple Concept of Paying Yourself First

Saving and investing, whether for a rainy day, extra income, or retirement, is viewed by many people as a "nice to have" rather than a "need to have." Here's why that's the wrong way to think about it.

Saving and investing, whether for a rainy day, extra income, or retirement, is viewed by many people as a “nice to have” rather than a “need to have.” 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.

But here’s a little fact for your consideration: your retirement day is closer today than it was yesterday, and it will be even closer tomorrow. Whether you plan to work as a physician for another 5 years, 10 years, or 40 years, the simple truth is that the day is coming when you will hang up the coat. What will you have when you get there?

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.

What does paying yourself first mean?

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. If this sounds OK to you, excuse me for being blunt, but you’re doing it wrong.

In a recent article on lies we tell ourselves about retirement, I discussed in greater detail the idea of lifestyle creep, by which we tend 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. One way to do this is through regularly payroll deduction contributions if you work for a group practice or institution that has one. Not all physicians have this option; if you are one who doesn’t, it is incumbent on you to set those funds aside yourself.

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 receive a raise or a bonus. 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. The debt you owe to your future self should have the same urgency as those you owe to others.