Paying yourself first is a popular concept in personal finance, and you’ve probably heard about it from your friends. It’s an essential practice whether you’re starting to look at your money or you’ve been managing it for a long time.
It may sound ridiculous to some people, especially when you’re dealing with many obligations at hand. But no matter what your situation is, and regardless of your age, you can always benefit from paying yourself first to save more money.
If you’re curious to know more about it and looking to find ways to start, we’ve laid down some tips and items for you.
What Does Paying Yourself Mean When it Comes to Saving?
Paying yourself is all about prioritizing your future financial well-being. You set aside money for your savings first before anything else. In a way, you’re paying for your future self’s financial well-being.
Most of us practice this routine: Income – expenses = savings. With this cycle, it’s easy to end up with nothing at the end, tempting you to abandon saving at all.
But when you practice this: Income – savings = expenses, you make a significant shift. Your message is clear: your financial well-being is not taking a back seat.
Why Should You Pay Yourself First?
When you pay yourself first, you build up a nest egg for your future’s security.
You prepare yourself for the worst: your car breaking down, you being hospitalized, your kid going to college in a few years, and many similar situations. In a way, you save yourself from the stress that comes with financial obligations, and you make a cushion for any financial blow that may come your way.
How to Pay Yourself First
Write Down Your Income and Expenses.
Look at your current income scenario and assess how much you can set aside for yourself regularly. This is where you lay down all your income streams, whether from your monthly salary, profit from a business, or dividends and interests from investments.
After knowing your income level, you should also determine your expenses. It’s best to start with your fixed expenses such as rent, utility bills, or groceries. They’re termed as ‘fixed’ because you will pay for them no matter the occasion or the season. They form a part of your basic needs. Then, you can add your other expenses.
Doing this is also a good exercise in reviewing your budget. You can look down at your income and find that you may have opportunities to expand it by having a side hustle or investing in a particular business. If you’re looking at your expenses, you can check if there are items that you can let go of or exchange for an alternative. Like a streaming subscription perhaps that you may not be used at all, or instead of a daily run at a coffee shop, you can buy your own beans and coffee maker and make your coffee at home.
Calculate How Much You Can Save Every Month
Like with your other expenses, you can only pay off what you can afford. It’s only sensible that you commit to an amount that you can sustain for a long time. When you’ve already determined your income and expenses, you’ll have a better idea of how much you can set aside for yourself.
You don’t have to make a big step and carry a heavy burden in the end. Starting small is better than not starting at all. You can give 5% of your income first, then gradually add increments as you progress until you reach your desired contribution. Be reasonable in your savings. As much as we’d like to take care of our future self, we also need to look after our present status, so pay yourself but not to the extent that your current situation is compromised.
Consistency will always be the name of the game. Even if you’re starting small but you’re doing it with much faith, you’re doing it right. If you have much discipline to set aside money manually, thumbs up to you. But if you’re not in that state yet, you can always opt to automate your savings, so you’re not tempted to skip your dues. You can arrange this with your bank or any saving facility that you’ve availed.
Paying yourself first is not just about building your savings account. There are many ways to secure your future financial well-being. Some of these include the following:
- Emergency fund: Ideally, your emergency fund should amount to six to nine months’ worth of your expenses and be stored in a high-yielding savings account. You’ll need this to cover financial setbacks, job loss, medical emergencies, and other unforeseen events
- Retirement: If you’re in your 20s, this may seem like a long way to go, but most people in their old age find that they don’t have enough savings to settle down. You can build your retirement fund in tax-advantaged accounts like 401(k) or any similar account applicable in your country
- Insurance (health, life, long-term disability, etc.): No one can predict the future – and certainly not you. Insurance is a tool for protecting your income should any unfortunate circumstance happen like hospitalization, accident, or your own demise
- Educational Fund: If you’re a parent, your child’s education takes a huge chunk of your income. With the rising school expenses, it’s only rational to save for your child’s tuition.
Other goals can include saving for a house, a car, or a dream vacation. The point is you have a purpose in mind for your money.
Paying yourself doesn’t have to require much sacrifice on your end. Starting on it may require you to practice self-restraint, but once you get the hang of saving, you’ll build a discipline and positive money habit along the way. When you learn to save money and grow your money for you, you’re on a path of financial freedom and security.
When you save today, you’ll save enough money to keep doing what you want to do in the future.
This was just one of many other money saving ideas that we have for you. If you want to find out more ways to save money, check out our list of additional ways to save money.