Have you heard of the phrase “pay yourself first”?“Pay yourself first” is popular in personal finance. It’s a budgeting strategy where you put your savings and investments on priority mode before any other expenses.The phrase sounds simple but applying it to one’s finances may seem more complex. So in this post, we are sharing how the system works and how it can help you get ahead in your finances.
What does it mean to pay yourself first?
It is one of the pillars when it comes to personal finance. It follows the golden formula of income less savings and investments is equal to expenses. In mathematical term, Income - Savings and Investments = Expenses.When you pay yourself first, it means you are setting aside money for your financial goals before spending.For example, it may mean:
In a typical budget, you allocate your money first on paying for your needs, your bills and your wants. Whereas, paying yourself first require you to automatically save and invest before you spend money.You are prioritizing your future self rather than focusing on short-term gratification.
Why paying yourself first is important?
Adapting the mentality of paying yourself first will enable you to achieve your financial goals faster. Nowadays, it’s easy to put-off saving and investing your money. How many times have you said that you’ll invest with your next paycheck? Or that you will start saving for an emergency fund with your bonus? Have you made New Year’s resolutions that involve paying off long-standing debt for real?Paying yourself first forces you to put your financial goals first. The saving and investing whatever is left on your paycheck should now be over! This time, you are choosing to put yourself and your journey to financial freedom before anything else.
How to Pay Yourself First in 3 Easy Steps
Now that we’ve identified how important setting aside money for savings and investments is, let’s go over the things you can do today in order to pay yourself first.
Step 1. Treat paying yourself first as a bill
You may be used to paying for your electricity, internet, cable or water bill first. This may be a second nature for you when you do your budget.Why not do the same on your savings and investments? Treat them like a bill. Before you spend for your discretionary (Read: wants over needs) expenses, make sure that you set aside a portion of your income to save and invest. Think of it as your first bill that needs to get paid every month.
If paying yourself first is new to you then consider starting small. Build your investment account one step at a time. At First Metro Asset, opening a mutual fund account is as low as Php 5,000 and additional investment is as low as Php 1,000. Do not be afraid to start small. Remember that all the payments and transfers you make for your savings and investments are considered progress.