Pay yourself first

One of the oldest and the most important rule of personal finance is “Pay yourself first”. Every book on personal finance says the same. All the blogs on personal finance I have read, says the same. Even our parents and grandparents made wealth by using the same principle.

So what does “pay yourself first” mean?

It means that you need to keep some portion of your net income aside before you pay your grocery bills, before you pay your phone bills, before you pay your credit card bills and before you pay for anything else. It is as simple as that. Most of the time we fail to do that as we never plan for it. We plan when we want to buy gadgets, cars, but we do not plan to save money. The biggest problem is that we try to save whatever is left after all the expenses.

Save a little money each month and at the end of the year you will be surprised at how little you have.
-Ernest Haskins

Many people do not save because they think that little amount of money will not get them fortune. They try to climb mountain in one day and end up spending their whole life at the bottom. To achieve every big dream you need to start with a small step. It is better to take many small steps in the right direction than to make a great leap forward only to stumble backward. Start saving from today, even if it is just a penny.

Benefits of paying yourself first.

Paying yourself first is the best personal finance strategy. You will get the same advise even from the top personal financial planner.

  • It brings discipline to saving. – When we start paying our self first, we keep saving as our priority.   This is the first step towards abundant wealth.
  • We save money from spending on things we do not need – Many a times we end up in spending money on things we do not want at that time, just because we have money in our pocket. Sale effect, peer pressure and many other factors are responsible for the same. If we start saving before spending then our money will start creating more money for us.
  • Power of compound effect – I consider compound interest as an eighth wonder of the world. You can’t even imagine how much you can earn by saving early. Use this calculator and see what would be your future wealth.
  • Using saved money for better purpose – You can use the money for emergencies or to buy a house or to pay for child’s education or even for your world tour.

You must have thought that you will start saving after your income reaches to a certain amount. Believe me you will not be able to save anything. Ideally our saving should increase when our income increases, but most of the time our expense increases when our income increases. It is always advisable to start saving as early as possible.

So the next question comes “How to pay yourself first?”

If you want to save with discipline then the best thing to do is to make it automatic.

  • For those who want to go for risk free saving, can ask their employer to increase their contribution towards Provident fund or 401k account. This will be deducted directly from your salary.
  • The best way to invest is through SIP. You can start SIP for mutual funds and can make arrangement with bank for ECS through which your money will be debited from your account every month.
  • One can also start recurring account with the bank that is giving highest interest rates.

You must be wondering what percentage of your income you should save. There is no fixed ratio, but 10% of your net income is a good number. If you cannot save 10% then start with 1% and then over a year increase your contribution.

Believe me if there is any real secret to become financially independent, it is “Pay yourself first”.

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