What Payroll Withholding Can Teach Us About Personal Finance

I was recently listening to a great little book on personal finance called The Automatic Millionaire. In it, the author David Bach describes a plan for achieving financial goals, so that long-term wealth is built with little to no effort.

Essentially, his advice is two-fold:

  1. Pay yourself first, so that a portion of your income is put into retirement savings before other expenses are incurred.
  2. Automate this process, so that paying yourself first happens systematically and without effort.

This is certainly not revolutionary advice in the field of personal finance, but the fact is that this process works when properly implemented.

So, how does this relate to payroll? Well, have you noticed how the government always gets paid first, and they have automated the process? That’s right! They are following the two principles outlined above.

If the government is good at anything, it’s good at getting paid. If you’ve ever dealt with the IRS (especially regarding employment taxes), you can’t deny that they are serious about collecting what they are owed.

Here’s how it works:

  1. The government gets paid first, through withholding taxes from each and every one of your paychecks. That’s right, the government takes their chunk out before you see a dime!
  2. The process is automated through your employer’s payroll system or through an outsourced payroll provider.

You may not like or agree with this process, but no one can deny its effectiveness.

After re-learning these principles, I have now set up two additional direct deposit accounts for my paycheck. Ten percent is direct deposited to a savings account at my bank, and ten percent is direct deposited to a retirement fund. The 80% remaining is direct deposited to my personal checking account.

I have automated the process of paying myself first.

What about you? How you can you apply these principles to your personal finances?