‘Pay Yourself First’. What the snappy little phrase really means

This is one of the keys to attaining financial success as preached by many personal finance gurus and books, such as The Richest Man in Babylon. The phrase doesn’t mean that you should give yourself a portion of your earnings to spend as you like. Instead, “pay yourself first “is all about prioritising saving a portion of your income.

The truth is that many of us have trouble saving. No matter how much you earn, you might always feel like you have too many pressing financial needs to save for the future.

“If you have urgent current expenses to cover, the future priorities like college and retirement fall of your radar because they’re simply less pressing,” says the book Scarcity: Why Having Too Little Means So Much. “Scarcity of attention prevents us from seeing what’s really important. The psychology of scarcity engrosses us in only our present needs.”

That said, anyone who is determined and disciplined enough can afford to pay themselves first. A research conducted by Massachusetts Institute of Technology found that people from all income levels, even those who live on less than a dollar a day, have the ability to save.

By adopting the ‘pay yourself first’ mindset, instead of directing all your funds towards bills, you will be on your way to achieving financial freedom.

Here are some tips and tricks to help you pay yourself first every month:

Where can you pinch pennies?

Bishop who fought for Kenyans  

How much money do you spend per month? Exactly what do you spend it on? To pay yourself first, you need to have clear answers to these questions. Track your expenses, however small, for a month. Keep a list of everything that you spent money on and exactly how much they cost you. You can use pen and paper or utilise one of the many mobile budgeting apps to track your expenses.

At the end of the month, put all of your expenses into main categories such as food, rent, utilities, transport, loans, entertainment, school fees and so on. Figure out which expenses you can reduce to direct the money into your savings.

Twenty per cent of income

The more you can save the better. Many financial experts recommend that you should save 20 per cent of your income every month. However, this saving goal might be either too low or too high depending on your financial responsibilities and goals.

The percentage of your earnings you can realistically afford to save depends on factors such as age, marital status, family responsibilities, stage in your career, and so on. Deciding on what you’re saving for and how much money and time it will take can help you determine the percentage of your income you need to save.

For example, you can aim to build a six-month emergency fund. After that is done, you can save up for a vacation or car fund. Ideally, every month you should be putting away a portion of your income into different saving accounts for different purposes which include retirement, emergency, children’s education, and vacations.

Snowball method of debt management

One of the biggest hindrances to saving for your future is debt. When you have to direct a chunk of your income towards clearing debt, you might have very little or nothing left to put in your savings account. To be able to comfortably pay yourself every month, you should figure out the best strategy to clear your debts. However, don’t prioritise debt over savings – this strategy can backfire on you and leave you in even more debt. Instead, figure out what portion of your income you can save while also paying down your debts.

Consider using the snowball method to pay debts. With this strategy, you list all your debts – from smallest to largest. Ignore interest rates and throw everything you can at the smallest debt. Meanwhile, you can make minimum payments on the big debts which are accruing interest. Once you’ve paid off the smallest debt, move on to the next one and the next one.

Before you know it, you will be directing all the funds you were using on the smaller debts to clear just one big debt. And soon enough, you’ll be debt free. After paying off your debts, you can direct all that money into paying yourself.

Get an account that adds value

You might feel like opening a savings account, in addition to your checking account, is too much of a hustle. But the interest you get on a checking account is will earn you very little over time. In fact, most checking accounts charge some monthly fees.

Shop around for a bank which has the best interest rates for savings accounts. Even a difference of 1 per cent can be significant with large amounts of money. After setting up your saving accounts, automate payments from your checking account. This will save you the trouble of having to transfer funds every month. The money left in your checking account will just be enough to cover your bills, so you won’t be tempted to spend money meant for savings.

Factor in inflation

Even though saving a portion of your income is crucial, no one has ever got rich solely from their savings. Even though you will earn some interest on your savings account, you will also have to factor in the standard inflation rate. This means that when your money is just sitting in a savings account, it is losing value. With the current inflation rate of 5 per cent in Kenya, this means that you will be able to buy 5 per cent less with the money after sticking it in a savings account for a year.

Once you have a six-month emergency fund, you should focus on investing the money you pay yourself with. Although investing has its risks, it gives you a much faster means to grow your wealth.

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The Richest Man in Babylon