The Golden Rule of personal finance: Pay Yourself First (2024)

Achieving financial success is a goal that many of us aspire to. We often wonder how the wealthy manage their money and seek tips and tricks to emulate their financial prosperity. Fortunately, there is a golden rule of personal finance that can set the foundation for your financial planning journey and guide you towards a brighter financial future and a healthy bank account.. This rule is known as “Pay Yourself First,” and it entails making a critical tweak to the traditional approach of managing finances.

Understanding the Traditional Approach

For most people, the traditional approach to managing finances involves a four-step process. First, income flows into their accounts. Second, they pay for mandatory expenses such as rent, bills, and loans. Third, they allocate funds for discretionary expenditures like shopping and dining out. Finally, if any money is left over, they save and invest it. While this approach is common, it often leaves little room for consistent and disciplined saving and investing.

The Golden Rule:

Pay Yourself first; The golden rule of personal finance, known as “Pay Yourself First,” introduces a critical tweak to the traditional approach. The expression “pay yourself first” refers to the investor attitude of automatically routing a specified savings contribution from each paycheck at the time it is received. It is used frequently in personal finance and retirement planning literature.

Instead of waiting until the end to save and invest, this rule suggests prioritizing savings and investments right at the beginning. Here’s how it works:

Income Flows In: As usual, your income flows into your account.

Pay Yourself First: Before spending on anything else, allocate a fixed amount for savings and investments. Treat this allocation as a mandatory expense.

Mandatory Expenses: After paying yourself, take care of your mandatory expenses, such as rent, bills, and loans.

Discretionary Expenses: Finally, use whatever is left over for your discretionary expenses like shopping and leisure activities.

Save what’s left: The amount that is left in your account balance after is reinvested into assets that meet the risk profile of the investor. This ensures growth through capital gains. When a capital asset is sold, its value increases, and this is referred to as a capital gain.

Integration with the 50/30/20 rule

The 50/30/20 rule is a popular budgeting guideline that complements the golden rule of personal finance, “Pay Yourself First.” While the golden rule emphasizes allocating a fixed amount for savings and investments before spending, the 50/30/20 rule provides a framework for budgeting your income across different expense categories.

The 50-30-20 rule recommends putting50%of your money toward needs,30%toward wants, and20%toward savings.

1. 50% for Needs: Allocate 50% of your income to cover essential needs such as rent/mortgage, utilities, groceries, transportation, and healthcare. These are expenses that are necessary for your basic well-being and should be prioritized.
2. 30% for Wants: Reserve 30% of your income for discretionary expenses or wants. This category includes non-essential expenses like dining out, entertainment, vacations, hobbies, and luxury purchases. It allows you to enjoy your money and indulge in things that bring you pleasure.
3. 20% for Savings and Debt Repayment: Allocate 20% of your income towards savings and debt repayment. This category aligns with the concept of “Paying Yourself First” from the golden rule. It emphasizes the importance of saving consistently and making progress in reducing any outstanding debts. This portion can be further divided, with a portion going towards emergency savings, retirement contributions, and debt repayment.

By combining the golden rule of “Pay Yourself First” with the 50/30/20 rule, you create a comprehensive approach to managing your finances. The golden rule ensures that savings and investments are prioritized, while the 50/30/20 rule provides a framework for allocating your income across different expense categories.

Implementing both rules allows you to achieve a balance between meeting your immediate needs, enjoying discretionary expenses, and building a strong financial foundation for the future. It encourages financial discipline, mindful spending, and a proactive approach to saving and investing. By consistently adhering to these guidelines, you can work towards financial stability and long-term success.

Benefits of the Golden Rule

By implementing the “Pay Yourself First” rule, you can enjoy several advantages and transform your financial habits:

Disciplined Saving and Investing: By prioritizing savings and investments, you ensure that you save consistently each month. Money gets invested before you have the chance to spend it, establishing a disciplined approach to building wealth.

Prudent Financial Management: By de-prioritizing discretionary expenses, you give importance to saving and mandatory expenses. This prudent approach helps you make wiser financial decisions and build a stronger financial foundation.

Automatic Savings and Investments: To streamline the process, set up a monthly standing instruction from your bank account to a dedicated savings or investment account. This ensures that a fixed amount is automatically debited and invested each month without requiring your intervention.

Shifting Mindset: By considering savings and investments as mandatory expenses, you reframe your mindset and treat them with the same importance as rent or bills. This shift helps you view saving and investing as essential components of your financial well-being.

In summary

Incorporating the golden rule of personal finance, “Pay Yourself First,” can revolutionize your financial planning journey. By allocating funds for savings and investments before anything else, you establish a disciplined approach to building wealth.

Remember to choose a bank account that offers benefits, track your expenses, control impulse spending, and educate yourself about personal finance. Embrace the power of compound interest, save loose change, and avoid taking up unnecessary loans. With a savings plan in place, you can secure a prosperous future. By adhering to these golden rules, you’ll pave the way for financial success and achieve greater control over your financial destiny.

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