Skip to main content

Pay Yourself First!

Lesson 7 from: Start Late, Finish Rich

David Bach

Pay Yourself First!

Lesson 7 from: Start Late, Finish Rich

David Bach

buy this class


Sale Ends Soon!

starting under


Unlock this classplus 2000+ more >

Lesson Info

7. Pay Yourself First!

Lesson Info

Pay Yourself First!

Pay yourself first. These three words, this is truth, like this is what should have been taught to you by eighth grade. These three words are the number one secret habit, and it's not really a secret anymore, is the number one habit that ordinary people use to build real wealth. Like when you go back to the McIntyres in The Automatic Millionaire, what did they do? They paid themselves first. And what I'm going to talk about today is that unfortunately most people don't. So there are six routes to wealth. Let's talk about the number one approach to wealth in America today. Guess what it is. Paying yourself first? No, it should be paying yourself first. See, you're all such good students. The number one approach is to win it. So 70 to 80 billion dollars, roughly, I think last year we spent on lottery tickets here in the United States. It's not worldwide. You've seen people do this before, right? So how many people know someone who's won the lottery? One person? Every room out of two ...

people. I'm like, three people. Did they give you any money? No. No. Okay. (audience laughing) So guys, it's really not a real approach to build wealth. Now, the amazing thing is that intelligent, educated people, some of you are watching, are putting more money into lottery tickets than a pay-yourself-first account. It's just sad. You know, it's a tax on, like, silliness. So don't do that. Second approach is to marry it. As the great Dr. Phil once said, how is that working for you so far? Marrying for money, sometimes you pay for it for the rest of your life, so. Third approach is to inherit it. Now, this is actually true. There's a lot of inheritance coming our way. Depends on whose numbers you look at, but somewhere between 20 to 30 trillion dollars in wealth is going to transfer from one generation, in theory, I say in theory, to the next generation here in the next 20 years. I say in theory because, look, how many of you now know people who are in their 90's? Yeah, I know people in their 100's. So if you've got parents right now that are 65, or 70 or 75, there's a really good chance they're going to live to be 100, 105, maybe longer. There may not be an inheritance coming your way. The other thing is that if you go home and you see your parents on the holidays, and you're like, "Hey Mom, Dad, how you feeling?" And they're like, "I'm feeling great!" And you're like, "God, the person's going to live forever," like, you know, that's not good. I'm going to see my parents this weekend, guys, I want you live forever. I don't care about the inheritance. So you can sue for it. This is just a sad, sick, disgusting way that people try to build wealth in this country. That's not the answer. You can budget for it. Do I like budgeting, yes or no? No. No. Why don't I like budgeting? Because budgeting doesn't stick. People go on budgets. They fight about budgets. They get off of budgets. Budgeting is harder than even dieting, and I don't even think that dieting works either, typically. It is not a lifestyle-sustainable plan. The lifestyle-sustainable plan when it comes to your money is pay yourself first. And it is a decision, and it is a philosophy, and you really have to just believe in your core that the first person who should get paid on your paycheck is you. And you need to be almost pissed off if you're not. That's how you need to be rooted. So what does this really look like? When you earn a dollar, in the real world, who gets paid first? The government. Uncle Sam. And on average, federally, they take about 25-30%, so I just put 28 in the middle, and depending on the state, like in California, we got like 9% for the average state tax. You're losing a third of your paycheck to taxes, and again, the money's taken from you automatically. I want you to think about your money now on a clock. So I'm going to show you this clock right now and I want you to look at it this way. When you earn money right now, most of you are going to work. How many of you, by the way, if you weren't here, go to work? Some of you at home, like, you've got jobs, right? So most everybody here in the audience in the studio is working, right? So most people come to work, although these guys had to be here at seven today. But most people go to work at nine. And most Americans, you at home, if you have a job, you are working from nine to twelve o'clock on average for taxes. The first three hours of your day are going to taxes, which makes you kind of want to come to work after lunch time, right? See like, ah man, if I could just skip those first three hours. But this is real world. Three hours, two and a half to three hours of your day are going to go to taxes. Then you're going to work from one to two o'clock, on average, for your rent, mortgage, your housing overhead. Depending on the city you live in, like when you live in like San Francisco or New York or Chicago or Los Angeles, this is even more, right? Like it's very common that a third of our paychecks or more, in some states it's half of our paychecks, are going to housing. But this is sort of like the national average. Then you've got transportation costs, so I'm putting two hours here for rent and overhead. On average, Americans, an hour a day of their income is going to transportation costs. That's your car, your car insurance, your gas, unless today you're using something else to get to work, but that's pretty common. Then, from three to five o'clock is everything else, like food, health care, credit cards, entertainment, all the stuff that you do in your life. That's the rest of the day. Now the idea behind budgeting is that you will somehow come up with a way that at the end of the day, you're going to have this little sliver over here to save money. And I'm here to tell you that that will never work. And if you've tried it, you know it doesn't work. You get to the end of the year, there's no money. You get to the end of the paycheck, there's no money. This approach to wealth doesn't work. What works is a pay-yourself-first approach to wealth. So here's what needs to happen. You need to come in here, and I talked about this in an earlier lesson, and you need to pay yourself first one hour. One hour a day. Now, in your 401K plan at work, create a live 401K plan? Yeah. Good. In your 401K plan at work, you create a live, and everyone else gets one hour a day of your income. That, percentage wise, happens to be 12.5%. Now, I'm not against you saving more than 12.5%, like if you said to me, David, what about 15%? Fantastic. What about 10? That's good, but it's not an hour a day of your income. 12.5% of your gross income is one hour a day of your income. You save one hour a day of your income, and it's the first hour a day, and you build financial security for life. Does this make sense? So what does the average American save? The average American is saving about 15 minutes. And that's the ones that are saving. Now here's the, you're shaking your head, right? It's unreal. So here's the thing that nobody talks about. You're going to work an average of 2,000 hours this year. You're going to trade 2,000 hours of your time for income. Over your lifetime, you're going to work somewhere between 70,000 and 90,000 hours total. And the question you have to ask yourself is, if I'm going to trade all that time for money, shouldn't I damn well be the first person to get paid? Because you almost have to get pissed off about the way things are to make changes sometimes. So like if you're looking at your life, and you're like, I can't save one hour a day of my income, then you've got to go back to your life and you've got to go, you know what, something here has got to be changed. Like if there's two of these, maybe there's one of those now. You know, something here's got to be changed. Something's got to change so that this gets taken care of, so that seriously, you aren't worrying about money day in and day out. Someone, you just told me that you would have been eating cat food if you hadn't read The Automatic Millionaire 10 years ago. I want to hear your story later, but that's what she told me at the break. I'd be eating cat food. You're not going to eat cat food now, right? And it's this one hour a day of your income. Fidelity did a study recently. They're one of the largest 401K providers. They had 72,000 millionaires in the 401K plan. Want to know what the average amount of money they saved is? 14%. Just a little over one hour a day. Okay. So. How much? I gave you the number. For women, I'm going to say women at least 12%. Men 10%, but really, just use all 12.5%. Why do I say here men, why do I tell women to save more than men, typically? Because they live longer. Because you live longer, right. How much longer do you live on average longer, do you know? Is it five years? It's five to seven years. Typically you just really don't die anymore. You drink green juice, you're exercising, and you live forever, you just do. I have two Grandma Roses, one of them, when my Grandma Rose passed away at 86, and then the other at 97, she outlived two husbands. And they both lived long lives, but she outlived two men. I mean typically, you outlive the men in your life, so you need more money. One hour a day of your income, you got to invest it automatically, for the rest of your life. That is what you do. Here's the formula people get wrong. Here's what people do. You want to be dead broke, don't pay yourself first. That one's easy. Spend more than you make. How about poor? Think about paying yourself first. Don't actually do it. Tell yourself someday. But you're going to change. Middle class. I'm not against being middle class by the way, it's cool. This is a number, save 5-10% of your income. If you're saving 5-10% of your income, you are not going to have massive financial security. Okay now, the average 401K contributions contributes between 3-6%. So if you're in here, everybody, some of the people at CreativeLive are watching this and got lots of millennials watching this, don't save 6% of your income. Change this today. One of my greatest victories was when I did the Oprah show on The Automatic Millionaire, I said my goal was to get 10 million Americans to pay themselves first, and up what they were saving. And Oprah, these people watched the show live, and so many people that were watching that show live went after I left the building, they like went down to HR and either signed up for their 401K plan or increased their 401K plan that the head of HR called the president, and was like, "What the hell is going on here today?" And they're like, "We had this guy, David Bach, "com here and talk about that." This is what you need to do. This doesn't work. If the only thing you do from being here today is I get you to change this, then my day here was worth it. So you pay yourself first. Here's the rich numbers. 10-15%, upper middle class. Here's the formula for rich pay yourself first. 15-20%. Here's the rich enough to retire early. 20%. And more is better. It's all perspective, right? It's all perspective. You can do this. You decide, but make a decision. Where do I put it? These are the accounts. IRA account. Spousal IRA. 401K plan. SEP IRA. Three key plans. IRA's, 401K plans, and SEP IRA's. By the way, that SEP IRA number is $54,000 right now. That is a typo. Really worth saying here, depending on when you watch this, you got any questions numbers that are here, go to You'll always be able to look at the latest numbers. These numbers change every year. These are the catch up provisions, so if you're over the age of 50, you can put $6,500 away. If you're over the age of 50, you can put $23,000 away. All tax deductible. And one thing you have not heard me talk about yet are Roth IRA's and Roth 401K plans. The reason I haven't talked about them is they're not tax deductible. So you can pay yourself first, but you can't get out of paying taxes using a Roth IRA or a Roth 401K plan. You're going to pay taxes first, then you're going to put it in the Roth, then it's going to grow tax-free, then you can take it out tax-free. So the big difference between these two types of accounts is when do you want to pay your taxes? Now, the traditional thought process is use a Roth, because taxes will be higher later in life when you're older. I don't know about that. Depends on who the president is. We don't know what's going to happen later. Here's what I know. I've never used a Roth. I like deductible IRA accounts because I don't want to pay tax. So if I get $10,000 and I can put the whole thing into a deductible account, in order for me to put $10,000 into a Roth account, a Roth 401K plan, I had to make 15. Does that make sense? So you just have to decide when do you want your tax deduction? I'm not against using these Roths, you just have to really understand the math. I would rather have all the money in my account. Yeah, I just had a quick question. There's salary caps for regular IRA's though, right? Not for a regular IRA account. Anyone can do a regular IRA account. You're thinking about that there's salary caps for Roth IRA's. Oh yeah, okay, so I got it backwards. Yeah, so for Roth IRA's there are salary caps. 90% of Americans never hit those salary caps, but you're absolutely right. Okay. So if you got a high income, you're making a half a million dollars a year, you're not using a Roth IRA. But SEP IRA's, I mean, that's what I need, right? Yeah, I'm going to get to SEP IRA in one second. Okay. So basics on 401K plans. One, are you enrolled? Use it. Max it out. Increase it. Know the numbers. Okay? Let's talk about SEP IRA's. Self-employed retirement accounts. This is the easiest one for you to set up. Where's my camera for the people at home? People at home who are watching, who are self-employed. This is the account for you because it's so simple. You can set up a SEP IRA in 10 minutes at any of those firms I just talked about Vanguard, TD, Amerit-- TD, Vanguard, Shwab, who else did I give out? Betterment, Wealthfront, you name a financial service company prominent, and you can open up a SEP IRA. Takes you 10 minutes. You can put 25% of your gross income away. The ironic thing is the government makes it much easier for self-employed people to be rich. You can put way more money away. $54,000 this year. So when you look at like, how do I start late and finish rich? If you're starting late and you're self-employed, provided you use this stuff, you've got some distinct advantages that employed people don't have. You're able to save twice as much money. You're actually able to save more than twice. You're able to save four times as much. I'll show you that in a second. But most self-employed people do not use SEP IRA's, and if they do use them, they don't fund them. And the reason they don't fund them is they don't fund them regularly and they get to the end of the year, and they haven't set aside enough money aside for taxes, and their self-employed retirement account never gets funded. For people in real estate, this would be the most important thing that I've taught real estate agents to do is this. My wife a real estate agent. She works in New York, The moment she opened up, the moment she got into real estate, she was in publishing, I'm like, you're going to have an LLC, which I'm going to talk about later. You're going to have a bookkeeper, and you're going to have a SEP IRA, and every time these commission checks come in, we're going to get this stuff funded. Here's another great plan, the Solo 401K plan. This plan is actually better than a SEP IRA because you can put the same amount of money, but you can actually get more money put away with a lower income. They're just a little more complicated to set up. Solo 401K plan is a one-person 401K plan unless you're married and you and your spouse are in the business, for a lot of couples, this is a great plan. $54,000 limit. Because it has, you can put the 401K portion in, plus a profit sharing, so you basically can put $18,000 if you're under the age of in the 401K plan, plus you can put 25% of your gross income. So as an example, if you're a really huge saver, on a $50,000 income, believe it or not, you could actually put $29,500 away and not pay taxes on it. Now, this is a really unique thing for, a lot of times I see couples where one person's working full time, and the other partner or spouse is self-employed, but the self-employed business isn't really being treated like a business, it's kind of like a side freelance project, and that money's not really being taken seriously, and I'll go like, look, you have a side freelance business where you're making 50 grand a year, and you take the money seriously, you could turn around and put $30,000 away tax-free, and in a decade, you're family's financially in fantastic shape. So for a lot of you at home, because I'm sure I've got stay-at-home parents right now watching this, who have what I would call a side hustle business. You're doing something that's bringing income. You should look at either the SEP IRA or the Solo 401K plan. Yeah. Does that work for S-corps as well? Yes. No matter what your entity is? Yep, doesn't matter. One more question, oh. Quick question about the pre-tax/post-tax with the Roth versus this. Aren't you, if you do a Roth, you're paying tax on what you make now, so you pay tax on a thousand dollars versus paying tax on a million dollars 20 years down the road? Is that true or not? It's not true. But let me tell you why it's not true. If you have a million dollars at the age of 59 and a half. Okay, that's when you can start pulling money out. You're not going to take a million dollars and pull it all out at once. If you did, then there's no question. Then you would be in a much higher tax bracket. But no one does that. What happens with retirement accounts is usually there's a whole bunch of savings in addition to the retirement account. People in the real world tap their retirement accounts last, and then they typically pull out three, four, five per cent a year. And so what happens is a person's retired, they have, like, they have no income. And now they're pulling out money and between all their deductions, they're actually in a super low tax bracket. That's what I've seen as a financial advisor. Okay, um, in a freelance business, can you do both a SEP IRA and the Solo 401K? No. Just one or the other. It's one or the other. Okay. Yeah. I gave you the firms before, TD Ameritrade, Fidelity, Charles Schwab, Vanguard. There are other firms, I just wanted to give you four firms. All four of these firms, big, giant, huge companies, all of these firms you can open these accounts online, you can call somebody and they can walk you through it. I also gave you earlier the robo advisor, and I want to give that to you again. Robo advisors, Wealthfront,, and So I gave you six firms, not the only firms out there, just wanted to give you six choices.

Class Materials

Free Bonus Materials

Automatic Millionaire Starter Kit

Bonus Materials with Purchase

Finish Rich Quickstart System
Pay Yourself First Graphic
Visual Notes 1
Visual Notes 2
Visual Notes 3
Visual Notes 4
12 Steps to Live & Finish Rich Graphic

Ratings and Reviews


Wow! I wish they taught this in school and I would be in a better financial position in my life than I am today. However, I feel hopeful and empowered after watching David Bach speak and I am taking the first step by upping my 401k. I appreciate the realistic approach to wealth and not a get rich fast scheme we all too often hear and the esoteric approach to wealth/happiness that was discussed at the end. Wealth is truly freedom, not just being "rich". Thank you again David and Creative Live!


As a self employed musician and artist, I have been a long time follower of David Bach! Every penny made as an artist counts, and David will help you make the most of it. This class and his books are life changing! I started following him 15 years ago. Financially I have had amazing years, and very rough years, which I know is very typical for artists and musicians. With David in my corner, I've always had peace of mind. From the beginning, when I was in deeply debt and couldn't even afford health insurance David gave me hope. Because of David's teachings, I now own my home free and clear, and have a nice retirement account building, as well as savings, and accounts growing for my children. While both my children are under the age of ten, I take every opportunity to teach my children how understanding money can free you to follow your dreams! A huge YES for this class! Thank you David!

Muniesh Khandelwal

S.M.A.R.T class. Action items well discussed. This is a must have class for those who want to move from a fixed mindset to growth mindset, literally through their own wealth portfolio. This class will show one the balanced pie approach towards wealth, it will challenge you to take action, and it will show you if one follows the strategies and takes actions, they will have a wealthy and a wise life. So glad at myself, that I invested my time to take this class

Student Work