What do we mean when we say 'pay yourself first?'

What do we mean when we say 'pay yourself first?'

What do we mean when we say 'pay yourself first?'

On the road to ‘earning more’  it is often recommended that you pay yourself first. But what does this really mean?

Does it mean that you get extra guacamole in your sandwich? Does this mean ensuring that you put money aside for a vacation? Or perhaps it is taking yourself and your friends to a nice restaurant and rewarding yourself with expensive cocktails and seafood platters for all your hard work?

Well, as much as I’d like to say yes, I have to say no, but maybe later. Getting there takes discipline, patience and some delayed gratification. 

Paying yourself first is about putting your future goals before your immediate expenses.  Paying yourself first is a popular phrase in personal finance and retirement-planning literature. It is an investor mentality where you automatically route a specified savings contribution from each paycheck at the time it is received to put towards your future goals, before you spend any money on expenses. 

A lot of people don’t consider saving for retirement, building an emergency fund or setting aside money for  investments as ‘paying yourself first’ instead they feel like it’s an unwanted, boring task that takes from your monthly income. However, the idea of ‘paying yourself first’ is one that centres you as the beneficiary of a disciplined savings culture.

The ‘pay yourself first’ method of personal finance, is choosing to put your money towards your financial objectives.

Why do people pay themselves first?

Paying yourself first will save you from a lot of financial hardship.Paying yourself first means prioritizing building up your wealth, preparing yourself for financial emergencies, planning for retirement and working towards investments you want to make. 

Ways to ‘pay yourself first’

Granted not everybody knows how to start paying themselves first. How do I start? What percentage of my income should I save? How do I break it down?

Like most things, it’s really what will cause you the least friction that you should go with.  With whichever method you chose, automate the process of putting the money aside; you can ask your bank for options. Save this amount in a different account that you can’t easily access (money market funds are a great option for this - we have a FREE guide to help you choose the right MMF for you). 

For now, I’ll introduce two methods:

  1. The top-down approach

This approach is really simple. As you receive your monthly income, you just decide on a percentage you will be taking out each month for your future goals. Simple. We recommend that you put aside at least 20% of your net income every month. 

  1. The systematic approach 

This approach is more detailed.  This approach is for those who want to know exactly what they are saving towards and for savings goals that have a time limit. This approach includes breaking down your saving goals into categories. e.g. retirement, building an emergency fund or paying for a vacation and deciding how much to pay into each saving goal each month. This method is particularly helpful when you want to really break down your financial needs and see how best to allocate when you pay yourself first. 

Do you feel like you don’t earn enough to pay yourself first? That’s understandable. A lot of people feel like they don’t but I’m here to tell you that you absolutely can. You don’t have to start by putting away a million shillings but you can start putting away what’s comfortable for you, even if that’s ten shillings a day. 

Set a goal, and with the help of our free savings calculator, you can see how best to break down your daily, weekly and monthly savings to reach your goals. It’s never too late to start, but if you haven’t already started, then today is the second best time to start. 

If you keep this up, in a few years or even a few months, you’ll have put aside enough money to invest in generating additional income and perhaps you won’t have to skip the guac in your sandwiches anymore 😉

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