When most household budgets revolve around meeting ends meet and living paycheck to paycheck, the concept of ‘Pay Yourself First’ changes the game altogether.
Ever heard of this very important concept in the world of Personal Finance.
Does that sound intriguing to you?
Before sharing insights on it, allow me to pop a few important questions to you.
Do you know how much you have in your savings bank account?
Have you started putting money towards your child’s higher education or your retirement?
Have you saved enough for your emergency fund to cover any unforeseen exigency?
If not, there are millions or might I say billions who fall in this category.
For this exact same reason, the concept of ‘Pay Yourself First’ comes in handy.
‘Choose to put yourself first and make you a priority. It’s not selfish, it’s necessary.’ – Keysha Jade
Paying Yourself First simply means putting a percentage of your income every month before meeting expenses and liabilities. It is keeping your own interest before anything else.
The concept goes something like this:
|Pay Yourself First|
A fixed percentage of one’s paycheck is put aside every month to one’s Investments account before paying your monthly obligations in the form of bills and other expenses.
The idea is to do this before paying your bills, your creditors and alike.
Pay Yourself First keeps your long term needs and interest at the forefront before anything else and puts ‘You’ in the driver’s seat.
If one saves what is left at the end of the month, s(he) is usually left with nothing.
We are set for failure if we say that ‘I’ll do it tomorrow’.
Tomorrow never comes.
Out of all the mandatory expenses, take ‘Pay Yourself First’ as the most important form of a mandatory expense and put aside some money on this expense first.
‘Following pay yourself first rule, is more a matter of self-discipline than anything else’ – Robert Kiyosaki
This approach is perhaps the best way for Long term wealth creation. If one saves even 5% of his/her income and invests it into Index Based Equity Mutual Funds, s(he) is well on her path to become Financially Secure.
Furthermore, when one automates the ‘Pay Yourself First’ contribution in the Investment account, it removes the temptation to miss a contribution and spend on unwanted expenses.
One may also use the ‘Pay Yourself First’ concept to meet any planned large purchases. This could be saving for an exotic vacation, buying a car and alike.
All this, in turn leads to building dedication and discipline in Finance related matters. And might I add, the peace of mind that comes with it is priceless.
‘The Secret to creating lasting financial change is to decide to pay yourself first and then make it Automatic’ – David Bach
The ideal way to pay yourself first is to automate it.
Use the auto-debit facility to put the Pay Yourself First Amount in the Instrument that one wants to place it.
This can be used in the any of the following:
- Retirement Fund to secure the future.
- Purchasing Insurance
- Creating Long Term Wealth
- Emergency Fund creation
- Paying Loans/other debts
‘The biggest and the most important bill that you can ever pay is yourself.’
There is a simple answer to this.
Any amount is a good amount. As a starting point, one can even place 1% of the take home pay into the Pay Yourself First strategy.
The meat of the matter is to get started even if it is with a meagre amount.
Once one gets into the habit, it is much easier to scale the percentage to 10% or even more.
Better still, one may approach this with Goal Based strategy. That is working backward keeping in mind the time frame and the needs in the picture and saving and investing to meet that specific need/desire.
‘Do not save what is left after spending, but spend what is left after saving.’ – Warren Buffet
Ideally speaking, no sooner than one receives the paycheck should one Pay Yourself First.
The objective is to put the Pay Yourself first amount to good use as soon as one gets its hands on the paycheck.
This way one can keep away the temptation to spend the amount on unwanted things.
Whatever you do. Never put the Pay Yourself First amount in the Savings Account.
Imagine this, with interest under Savings Bank Account fetching a paltry 2.5%-3% and inflation hovering around 6%, you are losing big time. The purchasing power of money is going down over time.
So, what is the best approach?
Clear off all your debts first from this approach.
Once you are done with this, go bonkers over investing in Equity Based Index Mutual Funds.
With historical returns of Nifty Index funds fetching 15%, one is well on its way to create Long term wealth.
The Long and Short of It
‘Pay yourself and your life goals first , then pay bills and expenses with what’s left.’ – Rob Moore
Managing one’s money can be boring to say the least.
Of course, one may never have much to talk about in the cocktail parties when the hot topics are usually the latest gadgets and exotic vacation that one went to or is planning for.
Ultimately, it all boils down to 2 choices: Being Rich or Pretending to be Rich.
Hope you make the right choice by making full use of this Golden Rule of Personal Finance.
To gain more insights on Personal Finance, also read: What are the Benefits of Investing Early?