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Pay Yourself First

Money comes in. Money goes out. Bills, debt repayment, groceries etc. After all that, how’s your saving strategy going?

Many of us dream of having lots of money someday. Some people get lucky and just hit jackpot, but for most to have a lot of money will require a strong plan. The money will have to be saved up through years of work, self-discipline, and through good saving and investing strategies. But that's where many of us get stuck. Because to have a lot of money later, means to start now. You'd need to start saving now. And that is difficult.


The best way to save is to first make yourself a realistic goal. If you are earning $2000 a month, and have $1000 to pay in bills (rent, water, internet, insurance) and another $500 in standard monthly living costs (groceries, subscriptions, fuel etc.) I'm not expecting you to be able to save $600 a month. You don't have $2100 a month after all.

I might not even expect you to save $500. Why not? Well, because unforeseen costs can always happen. Your washing machine might break down. Your car might need repairs etc. That's why it's a good idea to have a rainy day fund (which should equal about a monthly wage, in this case $2000) before even diving into saving for a long-term, more distant goal.

So, what is more realistic then? I think in the beginning, it's a good idea to put everything towards the rainy day fund. So, do try to save about $500 a month for 4 months, get your fund up to $2000 and hope it doesn't get too depleted in the meantime. Although unforeseen costs can always poke their head arounds the corner, don't be surprised if it might take you 5 months of saving $400 to get the fund to $2000. If you don't happen to spend the $100 you had "left over" in the initial calculations, great, put that in there as well on the day before you receive your wage. You might make it in 4 months then.

Then when your rainy day fund is at peak level ($2000) you can direct yourself towards your long(er)-term saving goals. As your rainy day fund is up and running, you should be able to direct all of the $500 "left over" money towards savings. However, what you might notice here is that all the money you have is being spend on necessities (rent, fuel, groceries) and you've left nothing for any niceties. Some people can do this quite well, others fail after a few weeks due to this restriction. If you're more like the latter, again "only" save $400, and give yourself $100 of respite, which you might even consider moving to a separate bank account. In this way, you've got a rainy day fund for unforeseen costs, $100 to make sure your life isn't too boring and you could go out and be social, or buy clothes etc. And you're still saving $400. If this still seems too restrictive change the numbers and have $300 in savings and $200 in respite. Just keep in mind: the more money you want to spend now, the less you'll have later!


But even with this greatly organised plan, things might not go as smoothly as hoped. Imagine you receive your wage at the start of the month. Now you can pay down your bills, which I recommend you time immediately after receiving your wage. Then the living costs are spread throughout the month (unless you time all your groceries at the beginning of the month too?). Then the month just moves along. You go to work, you see family and friends use your respite money and then at the end of the month see what you have left moneywise and move it to the savings account. Surprise, surprise, you didn't meet your savings goal. You didn't meet it by a longshot. This strategy doesn't work. Luckily, there is a way around this: Don't wait till the end of the month. Make paying yourself a priority, just like paying the bills. Yes, your savings will be a new bill. And you will need to pay yourself first.


And then the magic happens: rather than waiting till the end of the month to deposit the $400 into your bank account, you will transfer this money between current account into savings account as soon as your wage drops in. Yes, your savings will be your primary bill and it will need to be paid in full.

It seems such a small change, but it does actually work. How? Well, what paying yourself first does is adjust your spending to the money you have left. When paying yourself last, the money is waiting in the current account you mainly use for spending. As such, when checking your balance, it seems like you've got a lot more money left than you actually do. If you move your savings away from this spending account, it will reflect the value of the amount of money you have actually got left to spend. And people spend their money very differently when they have $200 left rather than $600. Moreover, you will feel quite bad when you dip into your savings account to take the money back into your current account and use it for spending. It feels dirty. It feels like you are cheating yourself. And you are. You are taking away from your future self to comfort your current self. Your current self might appreciate it. But how are you going to justify this to your future self? Especially, as money can grow when you invest it well.

Yes, I'm all for paying yourself first. It's a reliable method for making sure you reach your saving goals!

One quick note of caution: if you've set yourself a savings goal and even when paying yourself first, you seem to have too much month left at the end of your money, maybe the goal isn't realistic. You will have to go through your finances: figure out where the money is going and whether all of the spending is necessary. Do read my article on how to spend less. Or, if your spending really can't be changed, you either need to change your income, or your goals. Read my article on how to build a successful goal here.


It's important that when setting up a goal, you make it a clear priority. Paying yourself first is one way of clearly stating that your savings are just as important as paying down any other bill.

I hope this article was useful to you, and please do let me know which other techniques and tips you have (used) to reach your own saving goals!


Behavioural Science

Personal Finance



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