Apparently paying yourself first is one of the cardinal rules of personal finance, proposed by financial authors, advisers and bloggers as supreme then paying yourself last. Well I did not known what it meant. Turns out I was doing this anyway but it may help you with your savings.
What is paying yourself first?
In a nutshell the pay yourself first rule means that once your income hits your account, before paying any bills or spending your money you should be setting aside a portion to your savings. So your first item is to pay yourself. This does not just include savings but may include paying money into your superannuation account.
What is paying yourself last?
Paying yourself last is the opposite of this. You get your pay. Throughout the month or whatever pay period you are on you pay rent, groceries, loans, credit card and other bills. The concept here is that whatever is left over you then put into savings. It is probably how most people manage their money. It also is more likely that you have no money at the end to pay yourself because you have spent it all.
Why pay yourself first?
Often people see saving in such a negative way that they just do not do it. You need to establish positive habits early on in order for them to stick and become wealthy. By paying yourself first you are creating savings as a priority in your life and in essence are putting yourself as the most important person. If you pay yourself last you are more likely to spend the leftover money because you rationalise any reason to purchase someone or spend the money. In this case it is more likely to go on more frivolous items which you didn’t need. Paying yourself first also gives you a way to more successfully save for the goals you may have established in life whether this be a house, holiday or even just having a fund for emergencies.
How do you pay yourself first?
The best way I found of doing this was setting up automatic debits from my account where my pay went in, to a high interest savings account. The trick was to set this up to occur on pay day so the money had already left before I even checked my account. Essentially it became invisible because I didn’t even think about it being there or going. You may also consider setting up a salary sacrifice with your employer to put a small portion of your pay into your superannuation which again because it comes out of your pay you don’t even notice it (this will also help take advantage of the co-contribution scheme).
This doesn’t have to be a huge amount. If you’re worried about your cash flow start out small at just 1% of your income. Gradually you can start to move this amount up to see the best threshold. Alternatively use any raises to go straight into your savings-you are already used to a lower income and if you have more, you tend to spend more. I also like to think of the next tip as paying yourself first.
If your mortgage repayments go down keep paying the same amount. Again you are already used to it and your home loan will get paid off a lot sooner, leaving you more financially stable later on.