One of the oldest rules of personal finance is to simply pay yourself first. All the wealth creation books tell you to do it. All the personal finance blogs say it, too. Even your parents have given you the same advice.
But it’s hard. That money could be used someplace else. You could pay the phone bill, could pay down debt, could buy a new DVD player. You’ve tried once or twice in the past, but it’s so easy to forget. You don’t keep a budget, so when payday rolls around, the money just finds its way elsewhere.
And besides: What does “pay yourself first” even mean?
To pay yourself first means simply this: Before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. The first bill you pay each month should be to yourself. This habit, developed early, can help you build tremendous wealth.
Why Pay Yourself First?
If you’re just getting started in the Real World, saving may seem impossible. You have rent, a car payment, groceries, and maybe student loans. Sure, you’d like to save, but there’s just no money left at the end of the month. And that’s the problem: Most people save what’s left over — left over after bills and after discretionary spending.
But if you don’t develop the saving habit now, there are always going to be reasons to delay: you need dental work, you want to go on holiday with your friends, you aren’t making enough to pay your bills. Here are three reasons to start saving now instead of waiting until next year (or the year after):
1 – Creating Priorities
When you pay yourself first, you’re mentally establishing saving as a priority. You’re telling yourself that you are more important than the electric company or the landlord. Building savings is a powerful motivator — it’s empowering.
2 – Creating a Habit
Paying yourself first encourages sound financial habits. Most people spend their money in the following order: bills, fun, saving. Unsurprisingly, there’s usually little left over to put in the bank. But if you bump saving to the front — saving, bills, fun — you’re able to set the money aside before you rationalize reasons to spend it.
3 – Creating space for Emergencies
By paying yourself first, you’re building a cash buffer with real-world applications. Regular steady contributions are an excellent way to build a nest egg. You can use the money to deal with emergencies. You can use it to purchase a house. You can use it to save for retirement. Paying yourself first gives you freedom — it opens a world of opportunity.
I’ve never met anyone who does not wish they had started saving earlier. Nobody tells themselves, “Saving was a mistake.” No matter what your age, begin saving now. And if you already save, consider boosting how much you set aside each month.
How much should I pay myself?
While there is no exact rule on how much you should pay yourself the question we should really be asking in “how much am I worth?” The answer to that question is most likely 100% of your salary.
Ultimately we should all be striving to increase our payments towards ourself a to 80% but that is just not practical.
I suggest a good starting point is 10% of our income . Anything less and psychologically we would feel like it was a waste of time.
Once you have achieved the 10% and life starts to feel more comfortable try increase that to 15% or even 20%.
Where should I put the savings?
This is a great question and something that is vital to your success of creating wealth. Most people would put the money into a bank savings account. Unfortunate that would be the worst thing you could possibly do because it is to easy to access the money and the return is not good.
Ideally you should put it into a retirement fund or invest it in some way. I suggest you speak to your financial advices or if you don’t have one get in contact with us and we will connect you with one.
Remember that you were give the ability to create wealth!