The Golden Rule of Saving: Pay 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.” 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 dentist for another 5 years, 10 years, or 40 years, the simple truth is that the day is coming when you will want to retire. What will you have when you reach that day?

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. This can be a particular challenge for a dentist who owns or shares a practice, because there is always the question of how much to include as earnings for yourself and what to reinvest in the business.

This can also be a challenge for dentists because of lifestyle creep, which is the tendency 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. As much as you may want to reinvest earnings from the practice back into the practice, you should strongly consider doing so only after you have paid both your current and future selves.

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 have a spike in revenue from the business or a raise if you work in a group dental practice. 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.

A final note of great importance for dentists: As I covered in greater detail here, relying on the sale of your practice as the single biggest source of your retirement income is a very bad idea in most cases. Many factors will be at play when the time comes for that sale, including the supply of dentists in your area, the success of those practices, local demographic changes such as the departure of a previously big employer or industry in the area, overall property values, local property and business taxes, and many more. Many if not all of these factors are beyond your immediate control. Also, selling a dental practice is much more complicated than a home sale and can take much longer.

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.