Do you want to save money every month or work toward your financial goals? Pay yourself first may make your way toward your ideal life simpler.
Paying yourself first is one of the basic personal finance rules that many will tell you to follow. However, it’s hard. There are dozens of different things that you could do with that money. When you don’t keep a budget and payday comes, your money goes to the bills and goes out.
Probably you are trying to save money each month. What if you could save more money by making sure you are paying yourself first?
Most people manage their money like this: I get my income every month, I try to spend as little as possible, and what is left every month I save. It is Parkinson’s Law. It states that if you have a supply leftover (money, time, anything), the subconscious response is to use that supply.
Many people say they don’t have enough money to save, have an emergency fund, or invest. Their reason is that they don’t have the money to save more. If you have a hard time saving, paying yourself first could be the ultimate hack to start saving more!
What Do You Mean With Paying Yourself First?
Paying yourself first can have many forms, but it basically means that you are paying yourself as soon as you receive your paycheck (or are making your profit if you own a business). You can do this by putting a predefined amount into your savings account or pay off a predefined amount towards your debt.
The most important thing is that you are doing it first. Think of your savings (or debt) as the first bill you are paying each month. Prioritize it as the first thing you pay every month. It makes sure that it is no longer a desire, something you want, but something you are actually doing.
When you develop that money habit, you can grow your wealth over time.
How Will It Help Me?
Paying yourself first will allow you to save more money and cut back spending. If you get into your system that you will pay yourself first every month, the amount of money you have left is naturally the amount of money you spend.
At first, it might not be easy. Just like any habit you want to adopt, you get better over time with practice.
It will help identify the things that are important to you. You will stop buying things that aren’t giving you joy.
Paying yourself first will help you prepare for the future, which is extremely important. If you want to retire (early, or ever), you need to prepare for your future a priority. If you’re waiting until the end of the month and saving whatever is left, you are not making it a priority.
Using this method, I can save over 50% of my income every month!
In short, when you pay yourself first, you can help yourself to:
- Make saving a priority.
- You’re improving your financial habits.
- You’re spending money on things that are important to you, like financial freedom.
- Ensure that you prepare for the future by building an emergency fund, saving for retirement, and giving yourself freedom.
Types of Budgeting
It can be quite time-consuming to track down every dollar you spend and compare it against your budget. If you enjoy budgeting, there are the following budgeting methods:
When you have a hard time sticking to your budget, paying yourself first is the perfect solution. You automate your savings habit in an automatic way, where you don’t even know it’s missing.
How To Shape The Pay Yourself First System
When you want to pay yourself first, you are going to transfer money from your paycheck automatically. Before you receive it, you will not miss it, because it has never been there.
It is money reserved for your financial future, financial stability, and the goals you have set for yourself. You will save for long-term goals like retirement and short-term goals like a new car or a holiday budget.
The Pay Yourself First system begins by writing down how much money you make each month, after taxes. So let’s say you earn $2000 each month after taxes.
Now you write down your savings goals for the different areas in your life. We categorize them into these categories:
- Financial Independence Account
- Long term Saving for Spending
For me, I tend to reserve 15% of my income for each of these categories. This means that $300 goes into each of these categories immediately after you receive your paycheck. You can adjust the percentages according to your needs.
Financial Independence Account
Okay, so let’s start with the Financial Independence Account. You can use this one to invest in your retirement accounts, invest in individual stocks, bonds for risk reduction, or ETFs for diversification.
Another way to fund your financial independence account is to invest in Peer-to-Peer loans. You’re getting higher returns on your money by investing your money, which often means increased risk. If you want to start with Peer-to-Peer lending, Mintos and EstateGuru a great place to start.
Long Term Saving For Spending
Regarding Long Term Saving for Spending (LTSS), you can make different accounts within this category for individual goals. For example, I want to save $100 per month for my annual holiday, $100 for my emergency fund (if you don’t have it yet), and $100 to buy a house. It makes $300 in total.
If you have any minimum debt payments that you need to make, you can use this money to pay it off as well. As soon as you start paying off debt, it will get easier to have enough money saved for your other financial goals. Your debt payments will get smaller over time.
For the education account, you can invest in anything related to education. Taking on courses that will help you learn more about money, investing helps you further grow your salary. One example of that is Making Sense of Affiliate Marketing, where you learn everything about money.
You can invest in books with this money. A couple of my favorite books include:
- Rich Dad Poor Dad by Robert Kiyosaki
- Think and Grow Rich by Napoleon Hill
- The 4-Hour Work Week by Tim Ferris
How To Succeed When Paying Yourself First?
The most important thing is the habit. If you are getting into the habit of paying yourself first, this will bring you so much! You will get the feeling that you are taking control of your finances, which will bring you the feeling of freedom!
How do you put it into practice?
- Open a (high-interest) savings account where you automatically transfer the money the moment you receive your paycheck. If you have the possibility, you can also get the money deposited in your savings account.
- Try to use another bank when you open the new online savings account. For some, it helps to have the money not readily available. When it takes a business day to transfer the money, that may be what you need to not spend it.
- Set up an automatic transfer for as much as possible. If you have a budget, transfer money from saving to checking on a weekly or monthly basis. If you are investing, transfer money from your savings to your investment account weekly or monthly. If you haven’t started, here’s exactly how to start investing.
4 Ways To Successfully Pay Yourself First
If it sounds like something that sounds great in theory but would never work for you, I’ve got something for you. There are ways to build up the habit over time and take the first steps toward your financial goals. Here are a couple of additional ways to successfully pay yourself first.
1. Begin With Free Money, Your Employer’s Retirement Plan
If you want to pay yourself first and increase the amount you save every month, it would be wise to start with your employer’s retirement program. When your employer offers a retirement plan, enroll.
When you enroll in your employer’s retirement plan, your payment is deducted before taxes. You are saving taxes at the moment and saving for your future retirement plans. Some employers offer a company match, which gives you free money!
You set it up once through your employer, and you have it deducted every month, automatically. It’s a quick win that everyone should be taking advantage of.
2. Start Where You Are
Paying yourself first sounds fun, but you aren’t at that place at the moment? Start where you are. You can’t go from saving nothing to saving $1500 the next month. That’s not how life works.
Start with what you can at this moment in time. Start with $50 per month and see how that goes. Evaluate after a month. Should that amount go up or down?
When you do that, you will be able to increase your savings over time. It is better to start small than not to start at all. Compounding returns work in your favor, which means your money will grow over time.
3. Increase Your Earnings
When you want to save more, you can increase your earnings to do so. There are plenty of ways to do so:
- Negotiate your current salary. You could ask for a raise because you get paid less than your peers because you have learned new high-income skills or got promoted.
- Start a side hustle. Popular side hustle ideas include flipping things for profit, testing websites (this pays very well), starting a blog (my favorite), or become a transcriptionist.
- Look for passive income ideas. It includes building your own money-making machine, real estate crowdfunding, or dividend investing.
Funnel these extra earnings straight to your savings or investment account. That way, they’re not going to your checking account, and you’re not thinking of spending that money.
4. Reduce Your Spending
Last but not least, try to reduce your spending. When you’ve already set up a budget, you know where your money is going. When you haven’t set up a budget, you may want to track where your money is going in the upcoming month.
Please keep in mind that this is my way of doing things, so this is my personal preference. If you want to check whether it works for you, please start making these smart money moves for yourself. Don’t get overwhelmed by this.
Are you paying yourself first, or are you going to try this method?