You Should Pay Yourself First and Put That Money in an Index Fund
If you have a job, if you bring home money, if you have enough to cover the big three—food, clothing and shelter—and you also have enough to spend some amount of your money on discretionary things, such as that daily mocha latte or the occasional Big Mac extra value meal or maybe a once-per-week 7-layer burrito…if all of that is true and you are not putting anything aside to pay yourself, this article is for you.
Save Something From Every Paycheck
When I was a brand-new Lieutenant in the Air Force, my father gave me some advice:
“Son, save or invest some amount of every paycheck you ever get. I don’t have many regrets in my life, but there is one big one I do have: I wish I’d saved at least a little something from every paycheck I ever got. Even if it’s only $25 per month, start saving right now, and do it forever.”
Those were hard words to hear from my father, who at the time was a Chief Master Sergeant in the US Air Force, having achieved the Service’s highest enlisted rank. The year was 1987, and he’d joined the Service in 1957. He was rapidly approaching retirement from the Service after his 30+ years of active-duty service, so to hear he didn’t have and regretted not putting aside a nest egg spoke volumes in high volume.
For a relatively short time, I definitely took his advice.
How I Started Investing
One cold winter night up in Marquette, Michigan, a few of my fellow Air Force aviators and I sat through an investment orientation seminar hosted by a company called USPA/IRA. Throughout the evening, the moderators showed slides and charts, told stories, provided convincing anecdotes, and just generally espoused the virtues of regular monthly investments and dollar cost averaging. At the end of the evening, I was convinced I needed to join their ranks and invest in their funds.
So I did.
Some number of months later, I was talking about investing with the older, wiser Captain who was the Radar Navigator on my B-52H crew. He explained to me what he considered the perils of the front-loaded funds into which I was investing several hundred of my hard-earned dollars per month. In words that were not nearly so kind, he told me that the friendly folks at USPA/IRA were robbing me blind of earning power by taking half of all my invested money upfront. This really got me thinking…
See, the way this program worked back in the mid-to-late-1980s was this: you invest something like $335.00 per month (I’m pretty sure that’s exactly the amount they had me putting in, to be honest). Every time you deposit your $335.00 (for a period of one full year), the investment company takes half and invests the other half in the fund. It’s called a front-load, and back in those days, it wasn’t all that uncommon. The way they kept investors on board with this crazy scheme was with a penalty: if you pulled your money from their mutual fund, you lost the entirety of the half they’d been taking from you, and you paid the federal tax penalty for early withdrawal from your IRA before the appropriate age. Ouch.
How I Abruptly Stopped Investing
The good Captain convinced me I had made a terrible mistake, so after something like eight months—with only four more left before my front-load period was going to end—I pulled all my money out. I paid through the proverbial nose for that decision and, of course, had the worker bees at USPA/IRA howling at me not to do it. Looking back, I really wonder if they were worried about me or if they were actually worried about their precious 50% front-load fee. Well, truthfully, no, I don’t wonder at all…
It took quite a few years and a failed first marriage (which ended with her lawyer making me cash in another IRA and giving to my ex half the paltry total remaining after payment of exorbitant fees and penalties...but that’s another story) before I was able to start taking my father’s advice and paying myself in earnest again. And before I did, I spent lots of time doing my homework.
The long and short of what I concluded after the disaster of two cashed-in IRAs, lots of lost money, countless nights without sleep, and quite a bit of reading and researching—what I call my months- and years-long bit of homework—was this:
If it’s good enough for Warren Buffet, it’s good enough for me.
Most investors [have not] made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.
— Warren Buffett
What Does That Mean?
Well, it means that when a guy like Warren Buffet, who is one of the most successful investors of all time, who says he learned everything he needed to know from reading Benjamin Graham’s Intelligent Investor, who is worth somewhere between $80-$100 billion on any given day…when he has advice to offer, it’s probably advice worth listening to and following.
Over the years, I have read and re-read what Warren has said on the topic of investing for the average person, and I think it boils down to this:
Invest in what you know. If you don’t understand a business, you shouldn’t be investing in its stock. Period. That’s his advice, in my words, so the emphasis is mine. Period.
If you can’t invest in stocks of businesses you understand—for whatever reason—then you really shouldn’t be investing in stocks. You should instead invest in index funds that don’t carry ridiculous, out-sized fees.
Specifically, in a letter to his Berkshire-Hathaway shareholders in 2014, Warren Buffett wrote:
“Most investors [have not] made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power. [Importantly, however], the typical investor doesn’t need this skill. [Indeed], the goal of the non-professional should not be to pick winners—neither he nor his “helpers” can do that—but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.” 
Advice doesn’t get much better than that, particularly when it comes to your money.
How I Started Investing...Again
Pay yourself first. Even if it’s a modest amount. When I finally returned to investing after years of false starts, I put $25 per month in an index fund for my IRA. As I would get pay raises over the years, or as the bills my current wife and I had accrued were paid off, we continued to increase the amount of money we stashed away every month. In time, this monthly payment to ourselves turned into a real retirement nest egg for us.
I Wish I'd Started Sooner
I am glad we started investing for our future when we did. If I have any regret, it is similar, though not identical to my father’s: I wish I’d started more in earnest, been more tenacious, stuck with it through thick and thin, all those years ago when he gave me his very sage advice.
My advice to you? Pay yourself first. If you have any discretionary money, you are in a position to do that. Then, take onboard and act on the counsel of the Oracle of Omaha and put that pay into low-cost funds that track the S&P 500 index.
When you do, you won’t regret it. Happy saving, everyone!
 Berkshire Hathaway. "To the Shareholders of Berkshire Hathaway Inc.," Pgs 20-21. Accessed 13 January 2021. I think it’s worth noting here that Buffett concluded the section of his letter that included this advice with the following paragraph:
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions or individuals—who employ high-fee managers.
A Little About Me
I retired at age 58, thanks in large measure to a disciplined approach to saving and investing that my wife and I share. We took my father’s advice as early on as we could once we got together, but we spent several years paying down accrued bills. After we started investing, if we were given a pay raise, a portion of it always went into savings or investments.
Because I’m not a professional broker, both of our IRAs are invested in index funds, just as Warren Buffett suggested. I will say that, in hindsight, it took me quite a few years to discover Buffet’s advice…but once I did, I rolled both of our IRAs from not-very-productive, high-fee funds to low-fee index funds just like he recommended.
I have no regrets in that regard, other than the wish that I’d done it sooner.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2021 greg cain