The Best Personal Finance Strategy — Pay Yourself First

Written by imoney

If you’re like most people, saving is probably an afterthought. Something you do with whatever you have left over at the end of the month after addressing all your financial obligations. And oftentimes, there’s nothing left, and you don’t put away any money at all.

It might seem difficult to pay yourself first when you’re facing a lot of bills and obligations. While paying your bills should be your priority, it’s also important to prepare for your future. Even if you can only save 1% of every paycheck, you should do it. Because if you’re not going to pay yourself first, nobody else is.

What is paying yourself first?

Paying yourself first has been called “the golden rule of personal finance.” Before you do anything else with your paycheck — like paying bills, buying groceries, or shopping — you allocate a percentage of it to a specified savings or investment account.

Basically, paying yourself first means you’re making preparations for your future finances (like building an emergency fund, putting away some money for retirement, or saving for a long-term expense) as a part of your regular financial routine.

Why pay yourself first?

1. You’re not tempted to skip saving for the month. When you get into the mindset of paying yourself first, it becomes a high priority. And when you do it before you do anything else with your paycheck, it’s out of the way, and you can focus on budgeting the rest of your money. If you pay yourself last, you’ll most likely spend all of it, leaving you with very little or no savings at the end of the month.

2. The sooner you start, the better. Compound interest on your money will help it to grow faster, so take advantage of time and start saving first now. And when your money grows at a quick pace, you reach your financial goals sooner, whether it’s building up an emergency fund or saving up for a new home.

3. Your long-term nest egg will grow with regular, consistent saving. Even if you only pay yourself with ₱100 a month, that will grow over time. Once you’ve developed the habit of paying yourself first, and you see how your savings are growing, you’ll be encouraged to increase that ₱100 to ₱200, ₱500, ₱1,000, or even more.

How do you pay yourself first?

1. Analyze your finances and assess how much you can realistically save every month. Paying yourself ₱5,000 when you only make ₱10,000 a month isn’t feasible. Sit down and analyze your salary and monthly budget and set yourself a realistic, attainable number — whether that’s ₱500 a month or ₱10,000. If you think you’re not saving enough, look at the items in your budget to see where you can cut down, and add that money to your savings target amount.

2. Automate it. Saving becomes much less painful when you don’t have to do it yourself. Using the number you settled on in Step 1, set up an automatic deposit into a savings account. This way, you’re providing for your future, and you won’t even feel it.

3. Adjust your savings when your income changes. You might only be saving P100 a month now, but if your income goes up, you should adjust your savings to go up as well so you can reach your goals faster. Accordingly, if your income goes down, maybe adjust your P10,000 a month saving to P5,000.

Paying yourself first can be hard to start, but once you do, you’re secure in the knowledge that you’re preparing for your own financial future while you can afford to. You’re using your money smarter and you develop good money habits that will serve you well throughout your life.

This article was first published in December 2014 and has been updated for freshness, accuracy and comprehensiveness.