What does it mean to pay yourself first? For most people this means to set aside a certain portion of their income toward savings and keeping the money they need for the future. It is simply a way to make sure that their needs are taken care of before all others. The idea here is to build up savings and investments so that you have money at your disposal when you need it. In terms of financial independence, confidence and security, this is of fundamental importance. Let’s look now in more detail as to what this means and how you can do it.
1) Save for the future
One of the most common ways people pay themselves first is to put part of their salary into a retirement account and another portion into a savings account. Spending your income on everyday things (groceries, fuel, electricity) is unavoidable, but there are other expenses like eating out and going to the cinema that are entirely discretionary spending that will rapidly deplete your bank account balance if you are not careful.
The basic idea here is to make sure the essential things are covered (your well being and happiness) and then . However, be smart and opt to pay yourself out of the revenue that comes in. To maximise the most from your bank why not switch bank account to save on fees.
2) Save at least 10%
Experts recommend saving at least 10% of your salary, which you will simply use to ‘pay yourself’. If you are in the fortunate position to have a large salary and relatively low living expenses, then you can probably increase that percentage to something like 20-30% of your take-home pay.
This is an incredibly important thing to get your head around. Sit down, look at what you spend your money on and I would be surprised if you are not surprised at how much you are spending each month on things that simply are not necessary. If you can take your cut off the top and also reduce your discretionary spend, you will not only have money set aside in investments for the future, but you will quite likely have money left over at the end of the month. Which brings me on nicely to the next point.
You’ve been paid. You’ve resisted the urge to spend like there’s no tomorrow for the past 4 weeks. Now you have some money set aside and some left over in your everyday bank account. So now what do you do?
Ideally, you would take whatever is left in the account and move it into a separate savings account. Some people will use the leftover to overpay debt (like their mortgage), others will put it in their children’s education fund, you might want to use it as part of a savings drive, while others might simply like to have it sit in a high interest savings account for a rainy day.
Having to deal with surplus money is always a good problem to have!
4) Don’t forget to always pay yourself first every month
Regardless of the percentage or specified amount you opt to set aside every month, make sure you always pay yourself a pre determined amount and make sure that you can set this aside somewhere where you can’t easily spend it.
Make yourself a priority. The idea here is to get you thinking about your financial future, because that matters as much, or even more, than your bills. Seeing your cash position grow will reduce stress, give you a sense of security and allow you to do the things you really want to do in life.
So, no matter what all you remember from reading this article, make you do not forget the most important point: pay yourself first.