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Paying yourself first is one of the fundamentals of personal finance and something that’s often mentioned or written about. In fact, I recently wrote about what it means to pay yourself first, but as it’s really such an important concept; here’s another post along with some practical tips on how to pay yourself first.
Do not save what is left after spending, but spend what is left after saving.Warren Buffet
Why pay yourself first?
A good starting point is really to ask why it’s even important or a good habit to pay yourself first. You see, as the quote from Warren Buffet goes, if we only save what is left after spending, there may well be nothing left.
It’s so easy to spend all our money. And by that I don’t necessarily even mean waste money on luxuries. Life is expensive and sometimes just getting through the month can be tough. But also, there’s a lot of pressure on us to look a certain way, do certain things and portray things on social media. It’s really not hard to justify our spending and the sad reality is there is generally little (or nothing) left to save.
A change of perspective however is to pay yourself first by setting aside a fixed amount each month and work your budget as though you didn’t even earn that money. It could be as little as R100 a month or, if you have the means, a much higher amount. If you save or invest this money immediately after payday you can then spend as you usually would, but with the peace of mind that your savings and investments are indeed growing.
3 Steps to paying yourself first
One would obviously want to maximise the amount that you pay yourself, but all in good time. Starting with a small manageable amount is good enough in the beginning and as you adjust to your new habit, you can grow your monthly amount.
The concept may be simple enough, but how do you actually implement this practically?
Make a budget
Having a budget is an essential to any financial management. It’s really hard (if not impossible) to make informed decisions without actually knowing how much you earn and spend each month.
Start off with a simple budget showing your monthly or weekly income along with all your expenses. You can look through the past month or two’s bank statements or credit card statements to help you see what the true expenses are. You need to be honest with yourself during this exercise to get the best results.
Check out my free Budgeting 101 course with some video interviews and a workbook to get you started.
The purpose of the budget is to see how much you can afford to save each month, or perhaps understand if you need to make changes to your spending habits.
Open a savings or investment account
This may seem obvious, but you need to separate account in which to save your money. You may perhaps already have such an account which is great, but if not, you may consider something like an electronic 32-day notice account from Nedbank. This will allow you save money, earn interest and keep it safe from temptation. You can easily access it, but only after giving 32 days’ notice (quickly done via the Nedbank MoneyApp)
Create an automated monthly transfer
This is the scary part for some, but it’s the ultimate commitment to paying yourself first.
You can do this when opening the Investment account, or at a later stage.
Using your banking app, create a recurring monthly transfer for a set amount that will take place a day or two after payday.
Using the Nedbank Banking App the steps would be as follows:
- Create a transfer and enter an amount.
- Select the account from which it is been transferred.
- Choose the account to which it is going.
- Enter a future date (not the current date).
- Choose the repeat frequency (weekly or monthly)
Make paying yourself first worth it
Setting up an automated transfer is quite a commitment and it can sometimes be tough on your budget.
Make it worthwhile though but setting yourself meaningful goals and rewarding yourself along the way.
It’s your money after all so you make the rules.