This post contains affiliate links; please read our Disclosure for more informationPay yourself first is a classic mantra you hear in the personal finance space. However how do you actually pay yourself first in reality?
We absolutely advocate the pay yourself first mindset, one that has changed our lives since its adoption.
I’ve been in many convdersations and debates about how realistic it really is to pay yourself first when our money is already tight.
But it’s not about the amount of money, it’s a mindset!
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Pay Yourself First – The Mindset
If you’re unfamiliar with this concept, pay yourself first is about putting money aside from your income for future you.
This concept is one of the key takeaways from The Richest Man In Babylon, a classic book about money.
You will only begin building wealth when you start to realise that a part of all the money you earn is yours to keep.
When I read this I began to open my mind to understand that building wealth is not about earning more money, but about making my money work for me.
Sure more money will help to but if you’re not paying yourself first from your current income, you’re likely to repeat that pattern with a higher salary.
You always pay others for goods and services.
When I read this my mind exploded! I thought getting a paycheck was enough to qualify as paying myself first.
The main point is spending money, on needs or wants, is putting money in other people’s pockets.
The big question is, how much of your income are you putting in your own pocket?
How Much Should You Pay Yourself First?
In the book, the writer advocates that everyone ought to pay themselves at least 10% of their earnings for future use.
To be fair, whether you put aside 10%, 2%, or 35% of your income for your future, the mindset is the same.
Whatever you decide to put away, the key point to note is the money you’re putting aside is for future you, not for Friday’s takeaway.
You want to put aside what you can afford to live without in the present day.
Take a look at your current budget and work out how much you can afford to save.
Analyse your current outgoings and identify areas you can make some savings or cut costs to give you an instant pay rise.
The money saved from your outgoings can be used to pay yourself first.
The main point is to start somewhere and aim to increase it over time.
We have designed a budgeting spreadsheet for you. It is the Ultimate Money Plan spreadsheet template with everything you need to take charge of your finances and crush your money goals.How Do You Actually Pay Yourself First?
There are various ways that you can pay yourself first, today I’ll share with you how we currenrtly do it.
Put first place to start is by changing your mindset.
Understand delayed gratification. Paying yourself a portion of your salary doesn’t mean it’s money lost.
I liken this to pizza. I absolutely love left over pizza, it tastes better the morning after! By this logic I’ve started to deliberately leave a slice or two for the next day.
The same applies to money, you don’t have to eat all of it today, leave a slice for tomorrow.
So you start paying yourself first by planning in advance to leave a slice of your money untouched for your future.
Here’s how you can put this into practice.
Pensions
Yes, you read that right. Pensions are a classic pay yourself first strategy.
A pension is not something for older adults to think about, pensions matter to everyone.
Check the pensions schemes local to you and your employer to find out what offers you have.
The beauty of most pension schemes, for the employed, is that the money is deducted from your gross pay.
Your pension contributions will be taken from your wages before you get the money in your bank account.
If you’re not employed or don’t have this option, there are pensions that you can set up yourself and begin investing.
However, like a employee pension once your private pension is set up you simply put money into it every pay cycle.
The biggest action on your part is to sign up to a pension, and the rest happens without you having to lift a finger.
Future Me Savings Fund
We believe there are three types of savings that everyone should aim to have.
An emergency fund, a sinking fund, and a savings fund for your goals.
An emergency fund is a pot of money you put aside as your financial cushion when unexpected costs come up.
A sinking fund is a pot of money you put aside for expected future costs. This includes annual bills, insurance renewals, and special occasions such as birthdays and anniversaries.
The savings fund for your goals is money you’re saving for your future goals like buying a house, doing a professional qualification, or for your wedding.
We would say start saving £1,000 in the your emergency fund, anything can happen so you’ll need some cushion.
Then you can build all three at once or one at a time after that.
All three serve different purposes and different parts of future you, but they all play a big role.
Future Me Investment Fund
Similar to the savings fund, this is an investment fund that you’re building for future you.
Saving and investing are two sides of the same coin, growing your money.
Investing your money is putting it into a vehicle that drives faster than savings.
By that I mean the rate of growth of your money will be much higher invested than saved.
Investing for your future is part of the long term wealth building game.
There are so many options and investment strategies out there, but for the average person starting out, index funds are a great option to consider.
To maximise your investment pots, consider investing through a tax efficient account.
This type of account allows you to make tax-free gains on your investments.
A bonus point is that pensions are also a form of investment. The difference is that there are laws around pensions accounts that offer tax relief and withdrawal restrictions.
With a regular investment account, you can still sell your investments and withdraw your money any time.
Pay Off High Interest Debts
Debts are a sure way of putting your money in someone else’s pocket, particularly consumer debts.
The higher the interest rate charged on the debt, the more money the lender makes from you.
Paying off your debts is a great way to pay yourself first.
Remember pay yourself first is about putting money for future you. Having high interest debts actually robs future you.
As you can see, by paying £100 more today you save future you time in debt!
The difference between these two is 6 and half years! That’s 6 and a half years that you’re no in debt in future.
Plus after you’ve paid off the credit card you can put that £150 monthly payment towards your future me saving and investment funds.
Have A Pay Yourself First Budget
Earlier on I told you to calculate your outgoings and analyse where you could save money.
This way you’re not overextending yourself beyond what you’re capable of doing.
A pay yourself first budget is one that prioritises you before everyone else.
In practice, this is deducting your pay yourself first amounts prior to the rest of the outgoings.
Our Ultimate Money Plan budgeting spreadsheet is set up this way.
So when you get a bonus, pay rise, or unexpected money coming in, you first pay yourself.
Having the pay yourself first amounts at the top of your budget ensures it gets done before you spend the money.
If you try and do this after paying for spending your money elsewhere, you’ll find that you’ll rarely save money for future you.
Money is so easy to spend. There’s always something that needs to be bought or paid for, we’ll never be satisfied.
Set up a pay yourself first budget which ensures you put yourself as a priority before spending your money.
Take Action
Set up your pay yourself first system with your money.
Every little helps!
Share this with your friend, family, or partner and encourage them to start paying themselves first!
Check out our Ultimate Money Plan to get in control of your money and smash your financial goals
Let us know how you’re getting along by getting in touch with us, we’d love to hear from you
Knowledge is powerless without action
So take action, and take care
Thando
