Building Wealth by Paying Yourself, Not Others

By: Duke Okes
Submitted: 2007-01-17 16:16:47
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One of the interesting things about many “average” individuals who are well off financially is just how frugal they are. That doesn’t mean they don’t spend their money, but they are very selective about doing it in that they consider how it impacts their long term financial health.

Anyone interested in building a nest egg large enough to give them financial freedom should also consider such a perspective. Following are three examples of differences in spending patterns and how they can contribute to financial success.

• Many home owners (and I’m using this term loosely, since they don’t really own it) don’t mind paying interest on a house loan because they can write off that interest on their taxes, thereby reducing what they give Uncle Sam. However, what they don’t consider is just how much money they’re going to give to the financial institution over the time period of the loan (it may be as much as twice what they paid for the house!). If they instead paid off the loan sooner then invest the extra funds, they can end up earning interest instead of paying it. They’ll be paying themselves instead of the bank.

• Leasing an automobile is less expensive than buying one if you only consider the monthly payment. But, not only have you given a substantial sum of money to the finance company during the lease, but at the end you don’t own anything and have to start all over. Purchasing a vehicle (especially if it is 2 years old, after which a lot of the depreciation has occurred and you can get it for much less than when it was new) is a lot less expensive in the long run, and the money saved can be invested. You’ll be paying yourself instead of the leasing company.

• Eating meals out instead of at home certainly has advantages … someone else does all the work. But it is very expensive when compared to home cooked meals (e.g., 3 meals a week at $35/meal is over $5000/year). You could instead be paying yourself instead of the restaurant, and earning interest on what you save.

These are just a few examples of how putting your money into your pocket, instead of someone else’s, can help you become what some call “financially free.” That is, they don’t worry about their next paycheck, since they have a steady stream of income from their investments they can rely on. But getting to this point requires a long-term perspective, rather than just thinking about what you want today.

Duke Okes helps individuals and organizations operate more productively and professionally. He can be contacted at http://www.aplomet.com

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