Blog | Personal Finance

Why Pay Yourself First Fails for Entrepreneurs

Here’s why Rich Dad’s age-old advice to “pay yourself first” is wrong for entrepreneurs (and what they should do, instead).

summary

• Classic advice doesn’t work when you run the business.

• Your business isn’t a paycheck—it’s your wealth engine.

• Entrepreneurs: Stop paying yourself first. Start funding assets.

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The following might shock you, especially if you've been following Rich Dad’s teachings for years. The advice to "pay yourself first" that Robert Kiyosaki has been sharing since Rich Dad Poor Dad—advice that has helped millions of people escape the rat race—is actually wrong for entrepreneurs.

Wait, let’s clarify before you close this browser tab.

The principle of paying yourself first is absolutely correct for employees and most people. But if you're an entrepreneur, you need to think differently. You need to operate at a higher level of financial intelligence. And that means understanding a more sophisticated approach to wealth building.

Let’s first explore why "pay yourself first" can actually keep entrepreneurs poor, and what you should do instead.

The problem with "pay yourself first" for entrepreneurs

When Robert wrote about the 10/10/10 plan—setting aside 10% for investing, 10% for savings, and 10% for charity—he was primarily addressing employees who receive a paycheck. For them, this system works beautifully because it forces them to build assets before they spend money on liabilities.

But entrepreneurs don't receive paychecks. They create income streams. And that fundamental difference changes everything.

Here's the harsh truth: if you're an entrepreneur who's paying yourself first, you're thinking like an employee, not like a business owner. You're extracting money from your wealth-building machine (your business) instead of using it to build more wealth-building machines (assets).

The three fatal flaws of "pay yourself first" for entrepreneurs

Fatal flaw #1: You're robbing your business of growth capital

Every dollar you take out of your business in the early stages is a dollar that could have been reinvested to generate exponential returns. If your business can generate a 20% return on investment but you're pulling money out to put in a savings account earning 1.5%, you're literally making yourself poorer.

Fatal flaw #2: You're thinking too small

The "pay yourself first" mentality encourages you to think in terms of percentages of your current income. But entrepreneurs shouldn't be thinking about percentages—they should be thinking about multiples. Instead of asking "How do I save 10% of my income?" you should be asking "How do I 10x my income?"

Fatal Flaw #3: You're creating the wrong money habits

When you pay yourself first, you're training yourself to extract money from your business. But the wealthy don't extract money—they accumulate assets. Every time you take money out of your business for personal expenses, you're reinforcing the habit of consumption instead of accumulation.

The entrepreneur's hierarchy: Pay your assets first

Here's what successful entrepreneurs do instead. They follow what Robert calls the Entrepreneur's Hierarchy of Payments:

• Pay your assets first
• Pay Your business second
• Pay yourself last

This might sound backwards, but here’s why this approach creates exponential wealth while "pay yourself first" creates linear wealth:

Level 1: Pay your assets first

Before you pay yourself, before you pay your business expenses, before you pay anything else, you invest in income-producing assets. This is different from the traditional "Pay yourself first" because you're not just setting money aside—you're actively acquiring assets that will generate income.

What this looks like in practice:

When cash comes into your business, the first thing you do is look for opportunities to acquire assets. This might mean:

• Buying rental real estate
• Investing in other businesses
• Acquiring intellectual property that generates royalties
• Building systems that generate passive income

The key is that these assets must produce income that's independent of your time and effort.

Level 2: Pay your business second

After you've acquired assets, you pay your business what it needs to operate and grow. This includes:

• Essential operating expenses
• Marketing and customer acquisition
• Technology and systems that increase efficiency
• Team members who can help scale the business

Notice what's missing from this list? Your salary. That comes last.

Level 3: Pay yourself last

Only after you've fed your assets and your business do you pay yourself. And here's the crucial part: you don't just pay yourself from your business income—you pay yourself from the combined income of your business AND your assets.

This is how the wealthy think. They don't just have one income stream (their business). They have multiple income streams (their business plus their assets), and they use the cash flow from all sources to fund their lifestyle.

Case study: The two entrepreneurs

Below is the difference between these two approaches with a real example.

Entrepreneur A: "Pay yourself first" approach

Sarah runs a consulting business that generates $20,000 per month. Following the traditional "Pay yourself first" approach, she:

• Pays herself first: $6,000 (30% using the 10/10/10 plan)
• Pays business expenses: $10,000
• Reinvests in business: $4,000

After one year, Sarah has:

• Personal savings: $36,000 (earning 1.5% interest)
• Business value: Modest growth due to limited reinvestment
• Total wealth: $36,000 + modest business appreciation

Entrepreneur B: "Pay assets first" approach

Mike runs a similar consulting business generating $20,000 per month. Following the "pay assets first" approach, he:

• Invests in assets first: $8,000 (real estate down payments, business investments)
• Pays business expenses: $10,000
• Pays himself: $2,000 (lives frugally in the short term)

After one year, Mike has:

• Investment assets: $96,000 invested, generating $800/month cash flow
• Business value: Same as Sarah's (same reinvestment)
• Total wealth: $96,000 + $9,600 annual passive income + business value

After two years, Mike's assets are generating $1,600/month, which he reinvests to acquire more assets. The compounding effect becomes exponential.

The psychology behind "pay assets first”

The reason most entrepreneurs struggle with this approach is psychological. Paying yourself first feels good. It provides immediate gratification. You can see the money in your personal account and feel like you're making progress.

But paying your assets first requires delayed gratification. You're sacrificing short-term comfort for long-term wealth. This is why most entrepreneurs never become truly wealthy—they lack the discipline to think long-term.

Remember: the rich don't cut expenses, they increase them. But they increase them through cash flow from assets, not by extracting money from their business.

The four pillars of the “pay assets first” system

Pillar 1: Develop asset recognition skills

• You need to develop the ability to quickly identify and evaluate potential income-producing assets. This requires continuous education about:
• Real estate investing
• Business valuation
• Stock market investing
• Alternative investments (commodities, cryptocurrency, etc.)

Pillar 2: Create multiple income streams

Your goal isn't just to build your business—it's to create a portfolio of income streams. Each asset you acquire should generate income that's independent of your time and effort.

Pillar 3: Reinvest your asset income

Here's where the magic happens. When your assets start generating income, you don't spend that income—you use it to acquire more assets. This creates a compounding effect that accelerates your wealth building.

Pillar 4: Scale your personal income last

Only after you've built a substantial asset base do you start extracting significant income for personal expenses. By this point, you have multiple income streams working for you, so you can afford to live well while still growing your wealth.

Common objections (and why they’re wrong)

You may hear entrepreneurs object to this ideology (you might even be hearing it in your own head). But let’s debunk those:

Objection 1: "But I need money to live on!"

This is the scarcity mindset talking. If you can't live on a reduced income while building assets, you're living beyond your means. The wealthy understand that temporary sacrifice leads to permanent wealth.

Objection 2: "What if my business fails?"

If your business fails and you've been paying yourself first, you'll have some savings but no assets. If your business fails and you've been paying your assets first, you'll have income producing assets that can support you while you rebuild.

Objection 3: "This sounds too risky."

The real risk is following the "pay yourself first" approach and ending up with modest savings while missing the opportunity to build real wealth. The wealthy don't avoid risk—they understand it and manage it.

The transition strategy: From “pay yourself first” to “pay your assets first”

If you're currently following the "pay yourself first" approach, here's how to transition:

Phase 1: Reduce your personal extraction (month 1-3)

Gradually reduce the amount you're paying yourself and redirect that money toward asset acquisition. Start by reducing your personal extraction by 25%.

Phase 2: Identify your first asset (month 4-6)

Use the money you're no longer paying yourself to make your first asset acquisition. This might be a rental property, an investment in another business, or any other income-producing asset.

Phase 3: Reinvest asset iIncome (month 7-12)

When your first asset starts generating income, resist the temptation to spend it. Instead, combine it with your continued business income to acquire your second asset.

Phase 4: Scale the system (year 2+)

Continue this process, using the income from your growing asset portfolio to acquire more assets. As your passive i

Transition today

For entrepreneurs, true wealth doesn’t come from setting money aside—it comes from building assets that generate income long after the work is done. While the "pay yourself first" mantra serves employees well, entrepreneurs must operate by a different financial playbook. Are you ready to switch it up?