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Pay yourself first is a message that many personal financial advisers have been preaching for a long time. But unfortunately, some of their audience are hearers and not doers. Personally, the message of pay yourself first is what I consider as a golden rule for anyone who is willing to take his or her personal finance very serious. It is just like saying that one should do the first thing first. For instance, it is expected that individuals should start pursuing how to achieve the goals set for the day in the morning. In the evening time, one can then return home to relax and possibly watch some movies. But if an individual should wake up early in the morning to start watching television when he has a lot to do for the day, this will look absurd. That is exactly what many people do when it comes to how they managed their personal finance.

How does pay yourself first concept works?

Pay yourself first concept is a very simple one. What it means is that, for every income you earn, you will first remove a certain amount or percentage from it and pay it into a dedicated account which is different from the account you use for your normal day to day transactions. It can be a savings account which you opened for that purpose. This method makes savings easy. Of course, this is contrary to the general practice where you will need to pay all you bills first before contemplating on what you can save from the remaining amount. The problem with paying your bills first is that, you may likely not have anything left for saving at the end. You may think that you will make up for this in the next month. This may just be an illusion as you may not be able to save anything again. This will continue until you realize that you don’t have anything in your savings account.

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So, how can you pay yourself first?

There are different options you can adopt in order to ensure that you pay yourself first. If you are an employee in an organization, you can instruct your human resources department to help you split your salary into two. The first portion will go to your savings account that is dedicated for savings or investment purpose. The second part will be paid into your regular checking account. With this, the money will not even touch your hand at all. This means that you don’t have the opportunity of dipping your hand into it. Your spending for the month will be based on the money that goes into your regular checking account. If you are doing this for the first time, you might feel the effect on your spending initially. But with time, you will get used to it. It is actually doable no matter your income level. Many people complain about the inadequacy of their income as an excuse for not saving. But the same people can afford to spend money on telephone, cable TV every month. The question you need to ask yourself is: If your salary is slashed, won’t you still cope? I know you will prefer a slash in your salary to being laid off. So, if you can cope, definitely you can afford to set money aside from your current salary by ensuring that you pay yourself first.

Another way of paying yourself first is to move certain amount from your checking account into your savings account every month by yourself. You can even make this a standing order to your bank every month. If you make it a standing order, your bank may charge you a token amount. There are apps that can also help you do this. Try to find this out on your own.

How much should you pay yourself first?

I will say that it depends on your situation. You will need to start by preparing your monthly budget. Look at what your expenses may likely be. Your monthly expenses will include things like food, transportation, utility payments, insurance and other monthly recurring expenses. Deduct your total expenses from your income. Whatever is left will give you a clue of what you can afford to set aside every month. If this amount is too small, you may look at areas where you can cut down your expenses. Once you have arrived at the amount you want to be saving every month, you will then need to pay yourself first every month by ensuring that you pay the amount into your saving account before you start disbursing the remaining. Some people may choose to pay a specific amount every month. This is suitable for people that earn regular fixed income. Others may choose to pay a certain percentage of their income into their savings account every month. This may work for people with irregular income. The amount they pay themselves will fluctuate based on the income they receive per time. This option may be good for self-employed or freelancers. Whatever option you choose, you just need to ensure that the amount you are paying yourself is enough. At the same time, it should not be too much to the extent that you strain yourself too much.

But can you still save if you have debts to pay? If you are having high interest debts to pay, it may be better for you to pay off the debts first so that you can concentrate on savings and investment. Investments will only make sense if the rate of returns on the investments are higher than the interest rates you are paying on your debts.

What do you use the money you pay yourself first for?

The essence of paying yourself first is to ensure that you don’t just blow off all your income on recurring expenditure. When you pay yourself first, the money can be used for different purposes as listed below:

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• Emergency Fund: Everybody needs to have an emergency fund from where one can pay for any unplanned expenses such as medical bills, burial expenses, unplanned trips and major repairs. It is suggested that you should have at least an amount that will cover between three and six months expenses in your emergency funds.
• Investing: Savings is not an investment. You can invest the money in mutual funds, stocks and other investment opportunities.
• Retirement: Paying yourself first can be a good way of ensuring that you have enough money saved towards your retirement.
• College: Possibly you plan to go back to school. Instead of relying on student loans, you can save money that will be enough to fund your education. Even if the money is not going to be enough, it will help you reduce the amount of student loans you may need to borrow.
• Down Payment: You may be planning to buy your own home in the future. This will require that you save some amount which will be enough for your down payment. Having enough money saved for down payment and other closing costs will help you avoid paying private mortgage insurance. You can also get your mortgage loan at a good interest rate.
• Major Purchases: Major purchase such as home appliances and vehicle purchase usually require large cash outlay. If you cultivate the habit of paying yourself first, you may not feel the impact on your finance when you eventually make the purchase.

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