Considering Motley Fool co-founder David Gardner named his podcast Rule Breaker Investing, you might expect that its sole focus would be on helping folks grow their money. But as it happens, the motto he and his brother Tom Gardner chose for their company is "Making the world smarter, happier, and richer" -- which covers far more ground than just the financial. In that context, it shouldn't be too much of a surprise that he frequently detours away from the world of stocks and into areas more connected with the "smarter" and "happier" part of the equation. Hence this week's theme: It's his fourth podcast of "mental tips, tricks, and life hacks."
In this segment of the podcast, "richer" is the focus, and long-term success is the goal. The life hack to get you there is called a "commitment device," and it's a great way to help you consistently pay yourself first, in a way that Future You will thank Present You for.
A full transcript follows the video.
This video was recorded on Mach 6, 2019.
David Gardner: All right, No. 2. This one comes straight out of classic personal finance. I don't do a lot of personal finance on this show. If you are somebody who is trying to get out of debt or figure out the best way to pay for your kid's college or make decisions about taxes this time of year, etc., I hope you know about our wonderful Motley Fool Answers podcast with Alison Southwick and Robert Brokamp. That's also a weekly Motley Fool podcast. It's there to answer all kinds of questions, but most of all, I think, to get people ready to invest, to get them to the point that they're making all the right decisions. This comes out of that vein, that tradition, if you will. I know a lot of you have heard this phrase before, but I think it'd be remiss if I didn't go with No. 2, this mental tip: "pay yourself first."
I'm reading an excellent book right now called Atomic Habits by James Clear. In a later chapter of his book, Mr. Clear introduces the concept of a commitment device. I'm just going to quote briefly. He says, "a commitment device is a choice that you make in the present that controls your actions in the future." It's a way to lock in future behavior, bind you to good habits, and restrict you from bad ones. In fact, in that chapter, it tells the story of the French novelist Victor Hugo, who wrote Les Miserables in addition to many other great books. Hugo was on a writing deadline and used this commitment device to make sure that he hit his deadline: he basically had his assistant lock all of his normal clothes away and just wore a robe with nothing under it. It was cold outdoors, and it meant he was not going to be going outdoors, and he really didn't want to present himself just in a robe to everybody. So, literally, that commitment device enabled him to get his writing done on time. It's these actions we take in the near term, which could be painful or highly inconvenient, but they lock in future good behavior.
I think one of the best things that you or I can do, especially as a young person, that very first job we get, immediately park whatever portion of your salary you can into the 401(k) plan. If your organization matches it, 401(k), 403(b), definitely maximize that. And just pretend that was never your money anyway. Pay yourself first, the line reads, the old saying goes. The idea being that you are paying your future self. You are creating savings by immediately invisibly having deducted from your paycheck as much as you possibly can save.
It's easy to say. It's a harder thing to do. But really, when you think about it, it's not that hard a thing to do, to check a box, to say, "Yes, enroll me in my automatic deduction," and just forego that money. Your future self will be so appreciative that you took that action.
I realize, in this case, it sounds like I'm just talking to people who are starting their first job. If that's you, I sure hope you're listening. But this kind of commitment device can be used in many different contexts in life. Let me paint a picture of what this looked like in one longtime Motley Fool member and Rule Breaker Investing podcast listener's life, and that's Dave Geck, who wrote on Jan. 1, New Year's Day 2018 -- and last year, I featured this on the podcast. In fact, Alison and Bro over at Motley Fool Answers loved it so much, they also featured it the same week on theirs. This is Dave Geck's story, and this to me is what paying yourself first looks like.
He wrote, "Back in 1975, one of my instructors took a few minutes to talk about finances. He had a recommendation. He suggested that when we graduated, we take $5 out of our $625 per month that we were going to receive as second lieutenants." Yes, Dave was in the military. $625 per month, the salary. The instructor said, "Take $5 out and do so without fail or changing the amount until you're promoted from second lieutenant to first lieutenant. And then the instructor asked us, how much would we have? Well, knowing it would take two years until we were promoted, we quickly figured 24 times $5 plus interest would be about $125. He commented that yes, it would not be much, but the goal of the first two years was to develop the habit of saving. He then suggested that upon getting a raise," actually two raises, you got one for the promotion and you got one for two years of service, "that we save half of the increase and use the rest to pay additional taxes and increase our standard of living. He pointed out that if we could make ends meet on a second lieutenant's salary in our 24th month, then we could certainly make it during the 25th month on that amount plus half of the increase.
"He said to do this throughout our career, and we would have a sizable sum by the time we retired. It made sense to me. I did not have a career of military service, but I followed his advice with my civilian pay. When I was about 55, my wife and I went out with another couple and the husband asked if we'd saved anything yet for retirement. He said they were concerned as they had not yet started. I related the story of my instructor's suggestion and said we were probably saving about 40% of my gross salary. They were shocked.
"The next day, I came home, and my wife created me with music to any husband's ears. She said, 'You're right.' I had no idea of what she was speaking and was almost afraid to ask what I was right about. She said that when she heard my story, she thought it was quite an exaggeration to say we were saving 40% of my gross salary. She said she'd never added it up but did so that morning. We had some money going here and some going there. She was shocked to find out it added up to 42%. She said she would have believed 30%, but obviously not 40%.
"In all my years, I've never heard of anyone else following this approach. I've suggested it numerous times but have no emulators yet. Though, I think my youngest daughter and her husband have been close to following it."
That is paying yourself first. Making it invisible. When a bountiful harvest shows up in your life years and decades later, all because of that early commitment device, that box that you checked, that resolve that you had to save.
For each of these, I've thought of them as either a mental tip or a trick or life hack. I'm going to call this one a mental tip. You could argue it's a life hack to always pay yourself first, but really, it's about your mentality. It's what's in your head and how that then plays out in your actions.