Why is it important to pay yourself first? (The number 1 savings hack)
Why is it important to pay yourself first?
You need to pay yourself first because if you don’t, you pay everyone else and then have what’s leftover, which is often not much.
Having a disciplined way to manage your money will help set you up for life, achieve more of what’s important to you and avoid bumps in the road.
Read on to hear why paying yourself is one of the essential steps to financial success now and in the long term.
What is the concept of paying yourself first?
Paying yourself first means putting a part of your salary into your savings account as soon as you get paid.
You do this before you spend any money.
Before you start spending money on food, entertainment and stuff.
This clever trick means you have turned the savings challenge on its head.
Rather than spending and then saving, you are now saving and then spending.
What is a good percentage to pay yourself?
As much as you can, so that you can slightly feel it.
It also depends on what your goals are and when you want to reach them.
The percentage is probably in the teens if not higher.
But if you can do that start somewhere and then increase it every few months.
Saving more is likely to make progress to your goals a lot quicker—act according.
If you take it too easy on yourself, you will probably save as little as you can, and worse, still feel good about it.
If you are finding it easy to save, then you need to try and keep more.
This doesn’t mean extreme frugality but challenging yourself to save more using what you have more efficiently and effectively.
There does need to be a balance between your today self and your future self.
How do you pay yourself first?
The easiest way to do this is to automate it.
Set up an automatic transfer for when you get paid that automatically sends the money to your savings account/s.
If you automate it, it takes out the weakest link in the savings chain: You.
If you leave it to yourself, you might well procrastinate, think you will do it later or double up next month.
You might well be your worst enemy when it comes to saving so take yourself out of it.
Where should I put my savings?
This is going to be connected to what you want to do with your savings.
What are your goals in every area of your life, and when might you need the money?
Here are a few areas where you might have goals or things to aim for.
- Health and fitness (run that marathon)
- Recreation and hobbies (that puzzle isn’t going to make itself)
- Family and Friends (nights in or out)
- Romance and Relationships (dates nights)
- Finance and net worth (this time next year, we will be millionaires)
- Career and business (is this the year to launch your side hustle?)
- Personal development (reading those books, taking that course)
- Spiritual goals (is it time for that silent retreat?)
Given the above goals and achieving these will help you understand where to put the money.
You need to keep an emergency supply of easy access money, an emergency fund of 3 -6 months living costs to make sure when things go wrong; you don’t need to go into debt to put them right.
- For short term needs, savings accounts would be good.
- Medium to long-term, i.e. 5 years and beyond, you could consider investing in the world’s great companies through ISA’s and Pensions.
FAQ: What does pay yourself first mean?
What is the pay yourself first concept?
The pay-yourself-first concept is that before your start paying out your money for food, accommodation, or utilities you set aside some of your money for yourself.
You pay yourself some of your money before anyone else and you place this in savings account for short, medium, and long-term needs,
It’s money that is put away for later and not for spending now.
How much should you pay yourself first?
You should really try to save at least 10 -15% and above. the more you save the stronger your financial position will be now and in the future.
If you save this it should start to prepare you for good and bad times ahead.
However, saving only 10% may still mean you have to work for 30-40 years so increasing your savings rate will be the key to early financial freedom.
What does “pay yourself first” mean when it comes to saving?
It means you save some money first before you start spending any. YOu save on the day you get paid and then spend what’s left.
Put some of your pay packet away straight away into a savings account. Keep doing this and one day work will become optional. The opposit will mean you have to work for EVER.
Summary: Why is it important to pay yourself first
Paying yourself first is the key to building financial wealth and the path to financial freedom.
If you pay everyone else first, you will likely end up with very little.
Pay yourself as much as you can – remember your worth it.
Automate the process – take the weakest line – You – out of the process.
Keep your goals in mind to keep you on the right path.
Find the right accounts for your savings to meet your short, medium and long term needs.
You never know what’s coming round the corner and this is why its important to pay yourself first because no one ese will do it for you.
Anyway, those are my thoughts on why it is important to pay yourself first; let me know yours in the comments below.
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