Column: The most important cheque

The most important cheque is the one you write to yourself.

In 1985, now-famous comedian and actor Jim Carrey was 23 years old, depressed, and broke. To cheer himself up, he wrote himself a $10 million cheque, dated 10 years in the future. Over the subsequent years, that cheque broke down in his wallet, but it constantly reminded him of his goal to make a great life for him and his family. Needless to say, he easily exceeded his goal.

Although there is a powerful lesson here in goal setting, there is a more practical strategy that we can immediately put to work:

Pay yourself first!

It makes so much sense, doesn’t it? Make sure the first cheque you write each month goes to you. It is the most powerful strategy available to us, yet very few people practice it. If you are looking for one simple habit to practice toward financial independence, this is it.

Paying yourself first also gives you access to another very powerful principle called Dollar Coast Averaging (DCA).

Dollar Cost Averaging (DCA) is a simple systematic approach to buying investments.  It helps to calm the volatility of your investment portfolio by breaking down large investments into smaller ones over time.

The benefits are clear:

1. Consistent wealth-building behaviour. Set up an automatic transfer of funds from your chequing account to your investment accounts. Then invest a fixed dollar amount weekly, bi-weekly, monthly or quarterly into a highly diversified portfolio, consistent with your risk profile and objectives.
2. Consistent investment approach. The ideal investing approach is to buy low and sell high. That is impossible to do reliably over time, but this system is an easy compromise. When the markets drop, you will buy more shares and when the markets rise, you'll buy fewer shares. No more speculation.
3. Financial “Easy Button.” Your wealth building strategy is on autopilot and only requires occasional tweaks.
4. You come first. Rather than prioritizing payments to everyone else, you get the first cheque!

Very few people consistently live on a budget. If they do, they often set the investing bar too low. Budgets are like diets and seldom work in the long run. Simply paying yourself first before anyone else gets a piece of your money is the easiest and most motivating investment system there is.

If you’re having a hard time with the idea of paying yourself first, imagine that you suddenly had a 10-per-cent cut in pay or that an additional 10-per-cent tax on your income was just introduced. Then, set up a systematic investment plan for your RRSP, your TFSA, or both and have that amount deducted from your bank account every pay period.

The amount you need to pay yourself all depends on the goals you have set, so it is critical that this investing habit be guided by a financial planning process that you can work with. To get the ball rolling, we have a wealth of financial calculators on our website that can help you see the impact over time of paying the most important person in your life – you!

Richard Vetter is a Certified Financial Planner and owner of WealthSmart Inc.