Pay Yourself First

“If thou wilt make a man happy, add not unto his riches but take away from his desires.” – Epicurus

I’m sure you’ve heard how important it is to pay yourself first. But do you? Are you making provision for the future in order to achieve your personal goals? If not, it’s probably time you started. Paying yourself first means automatically having a certain amount deducted from your income. That needs to happen before you even see it so you’re not tempted to spend.

The amount of time you spend in the market is more important than the exact date you start. In any case, now is the perfect time to find real bargains. And the beauty of compounding means that time will weather the ups and downs resulting in good returns over the long-term. Small steps forward can become great strides in the end.

“Knowledge comes, but wisdom lingers.” – Alfred Lord Tennyson

The easiest way to decide where that money should go is to take the passive investing approach. That means putting all the work into someone else’s hands. Basically, you can either go with mutual funds (unit trusts) or index funds:

1. Mutual Funds

By putting money behind a fund manager and the company he or she works for, you’re buying into a certain philosophy on investing and risk. You’re hoping that they know more about the market and can outperform everyone else.

A great way to chose fund managers is to look out for open communication, thorough research, good governance, low expenses, and a willingness to invest their own money alongside yours. Be thorough in checking out their past performance in order to determine whether or not it will be sustainable going forward.

2. Index Funds

Instead of struggling to determine who to invest with, you effectively invest with everyone when you buy “the market” in the form of an index like the S&P 500. Since the expenses charged for mutual funds are more than those charged for index funds, mutual funds must perform even better to achieve the same end return. Small numbers can add up to big costs, so pay attention to all fees as well as inflation going forward.

Index funds recognise that predicting the future is impossible, which means beating the market consistently is incredibly unlikely. Of course there are exceptions to the rule (like Warren Buffet or Peter Lynch) but finding these people in advance and hoping they prove just as prescient going forward is hard. As with most things in life, safety should be your first concern.