To pay yourself first, simply means to prioritise saving or investing, above all other things.
Instead of spending all your money and then seeing that there’s nothing left to save, rather save first, and then spend what’s left.
A typical example is a debit order set up with a financial services company that automatically contributes towards a Unit Trust, Retirement annuity, ETF or other investment. An automatic contribution to your staff pension fund also counts.
Just as a side note, whatever investment you choose, be sure to understand what the fees are as the fees really make a huge difference!
If you can’t trust yourself to save responsibly, don’t.
As I always say, personal finance is well, personal. And knowing your own personality, strengths and weaknesses, is part of the process.
If you know that you’re not good at saving, just automate it.
Putting yourself in the position where you have to choose between that schmancy-fancy dinner out with friends or saving towards retirement, will only end in tears. You’ll always find an excuse not to save this month, and how next month it’ll be different. To pay yourself first means never putting yourself in that position, and never “saving what’s left over”.
You WILL get there.
Consistency plays a huge role of personal finance. Achieving consistency is crucial to successful financial wealth generation. Unless you expect a massive windfall in the future, you must understand that financial wealth is accomplished over time, through making regular contributions to an investment of sorts.
As usual, start somewhere, and work your way up.
You can apply ‘paying yourself first’ to any part of your financial journey. Whether it’s building an emergency fund, or investing towards retirement. Personal finance can be hard enough, why face the same monthly battle for the next 30 years, trying to find the money to save.
If the thought of setting up a debit order to suddenly start siphoning off 15% of your salary every month is daunting, go for a phased approach.
Start with a 5% contribution for a few months, then up it to 10%, and when you’re more comfortable with making the right choices with your ‘left-over’ money, start contributing your final desired amount. In fact, why not calculate your Savings Rate right now?
This is not complicated stuff, but it does work. The biggest challenge you’ll face is the temptation to forego your monthly contributions in exchange for an ‘improved standard of living’. As tempting as this is, don’t lose sight of what retirement or financial freedom might mean to you.
Think about the financial future you would like, the financial situation you would like to leave your children. If it’s important to you then you should just start the habit ad pay yourself first. No matter what.
So just to reiterate, what does pay yourself first mean? To pay yourself first means that you first invest and put money aside for savings, and then work out how to cover your expenses.