Why It Always Pays to Pay Yourself First
As you learn the ropes of how to save money, you will encounter one key concept over and over again: pay yourself first.
But contrary to what most Filipinos think, “pay yourself first” is not about earning money. It’s actually about saving money.
Paying yourself first means you set aside a portion of your income every payday before doing anything else. That portion goes to your savings, emergency fund, insurance, health and retirement accounts, and other investments.
But what about your bills? You deal with them later, after you have paid the first and most important bill of all – yourself.
To help you remember, here’s a simple formula: Income – Savings = Expenses.
Why Should You Pay Yourself First?
Paying yourself first is not a new idea. Many wealthy individuals and self-made millionaires revealed that this golden rule of personal finance is the one thing they always abide by.
After all, paying yourself first has the following benefits:
It sets your priorities straight
How many times have you told yourself that you are going to start saving next month, only to find out that you had nothing left after you’ve paid all your bills and had a few nights out with friends? That ‘next month’ will never arrive unless you prioritize saving first.
It makes saving a habit
Paying yourself first might be hard to do at first, but it will develop into a habit as time goes by.
And if you set it as automatic payroll deductions, you won’t even notice the difference. Just set it and forget it.
It builds discipline
Keep in mind that wealth building doesn’t happen overnight. It results from deliberate, consistent, and disciplined action.
And as you see your wealth grow, it will motivate you to start other healthy financial habits, like cutting back on unnecessary expenses and finding other sources of income.
It makes spending guilt-free
Have you ever bought a dress on sale and then felt guilty afterward because you don’t really need it?
Well, you don’t have to feel guilty for spending money ever again, knowing that you already stashed some money into your savings.
It provides peace of mind
We know how important it is to save for the rainy days. By paying yourself first, you will no longer get sidetracked whenever an emergency comes up.
You can rest easy knowing that you can manage financially even if you suddenly get sick or lose your job.
How to Save Money From Your Salary
You may be thinking, “But I’m earning barely enough to make ends meet!”
Taking a long and hard look at your current cash flow is the key to getting started. The following are 3 simple steps to start implementing the “pay yourself first” rule in your life:
1. Evaluate where your money is going
The first thing you need to do is to sit down and make a list of your expenses every month.
How much of your salary goes to the bills? How about the mortgage or the car? Do you spend a lot of money going out for dinner, or shopping online?
Do this for at least a couple of months, and you will surely see a pattern in your cash flow.
2. See how much you can cut back
Now that you know how you’re spending your money, you can categorize your expenses into the essential and non-essentials. While you can’t do anything for your fixed house and car payments, you have control over other expenses.
For example, are you spending a lot of money for premium cable channels you don’t watch? Maybe you can downgrade.
Is a cup of Starbucks coffee every day really necessary? Maybe you can limit it to once a week.
Spending too much on prepaid load? Use Coins.ph to buy load online so you can earn rebates.
3. Create your savings strategy
Add up your extra money from step number two and consider that as your monthly savings.
If you save P250 from downgrading your cable TV and P600 just by cutting back on your weekly coffee consumption, you’re able to pay yourself P850 every month.
When it comes to paying yourself first, it doesn’t matter how much you can afford. What matters is that you stay consistent, and you’ll be able to build your wealth over time.