To pay yourself first, simply means to prioritise saving or investing, above all other things.
Rather than scrounge around at the end of the month to see if you can find the 12% or 15% required, by paying yourself first, you allocate a portion of your salary towards your investing goals the moment you receive your salary.
A typical example is a debit order set up with a financial services company that automatically contributes towards a unit trust or a Retirement annuity. An automatic contribution to your staff pension fund would also count.
As we have said before and would like to stress again, personal finance is not 1’s and 0’s… there are personalities involved. In our last article we talked about how to stop the biggest threat to your financial future – you.
Automating your investing is no different.
Putting yourself in the position where you have to choose between that schmancy dinner out with friends or saving towards retirement, will only end in tears. You’ll always find an excuse not to save this month, and how next month it’ll be different. Paying yourself first means never putting yourself in that position, and never “saving what’s left over”.
Consistency is a massive facet of personal finance. Achieving consistency is crucial to successful financial wealth generation. Unless you expect a massive windfall in the future, you must understand that financial wealth is accomplished over time, through making regular contributions to an investment of sorts.
You can apply ‘paying yourself first’ to any part of your financial journey. Whether it’s building an emergency fund, or investing towards retirement. Personal finance can be hard enough, why face the same monthly battle for the next 30 years, trying to find the money to save.
If the thought of setting up a debit order to suddenly start siphoning off 15% of your salary every month is daunting, go for a phased approach.
Start with a 5% contribution for a few months, then up it to 10%, and when you’re more comfortable with making the right choices with your ‘left-over’ money, start contributing your final desired amount.
This is not complicated stuff, but it does work. The biggest challenge you’ll face is the temptation to forego your monthly contributions in exchange for an ‘improved standard of living’. As tempting as this is, don’t lose sight of what retirement might mean to you.