“Pay yourself (money, energy, time, love) first. You'll have even more to give"- Anonymous.
Aditi has been working for the past four years. Yet, when her mother fell ill last month, she found that she couldn’t pay for her hospital treatment. Thankfully, her friend Arvind was able to help out. However, she felt guilty and wondered out loud:
Aditi: Arvind, how is this possible? I’ve been saving up for the last four years, but I have no savings. Where is all my money going?
Arvind: I’m not sure Aditi. However, I have seen a bit of your spending habits over the years and I know that you don’t have any emergency savings. I honestly think that your problem is that you don’t save before you spend money. If you’re paying for so many things you don’t need, why not pay yourself?
Here’s how you can do it:
Let’s understand what “paying yourself first” means
Paying yourself first is one of the key lessons in personal finance. The idea is to ‘pay yourself’ your savings at the beginning of each month before you spend on your monthly expenses.This way,you plan not only for the present but also for the future. After you have set aside your savings, you canprioritise and adjust your expenses tofit within the rest of your income.
“Paying yourself” means that you prioritise your expenses such as:
- Your financial goals – from higher education to retirement
- An emergency fund
- Insurance premiums
Why pay yourself first?
The core concept of ‘paying yourself first’ is that rather than spending on things and then saving the rest, you first save money and then spend the rest.
To incorporate the same, treat your savings as another bill you need to pay- which always seem more ‘urgent’- but make that the first bill you pay every month. That way, you will not only be able to save up the money you need but will also learn to spend within the money you have left.
The analogy of exercising in the morning explains a lot about the concept of paying yourself first. Just like exercising during the morning can boost your energy and help you have a longer, more productive day, saving before you spend can help you spend more in the future from your savings.
When you set aside money for your savings or emergency fund, you will always be protected in a financial emergency. While paying day-to-day bills is just as necessary, preparing for the future means that you will always have something to fall back on in case you have a sudden medical emergency to pay for, or are without a job for a few months.
Watch Old vs New: Effective ways to save money to know about more ways to save.
How do I pay myself?
Here’s how you can ensure saving by 'paying yourself first':
- Calculate the minimum amount to save: If you don’t have a specific goal in mind, decide the minimum amount you will set aside as savings every month. When saving towards a specific goal, calculate the minimum amount you need to save every month to achieve that goal in time.
- Create a separate account:Keep a separate bank account for yoursavings so that you canconvenientlykeep trackof it.
Pro tip:You can set up auto-debit on your salary account for the savings amount to ensure you never forget to save.
- Let your savings grow: Once you have saved a considerable amount, take note of your financial goals and lock your savings for mid- and long-term goals in a savings or investment instruments like Certificate of Deposit, Recurring Deposits, Mutual funds, etc. for a higher interest rate to maximise your savings and achieve your financial goals sooner.
What if I can’t keep up?
If you are not able to manage your monthly expenses after paying yourself at the beginning of each month, take another look at your budget to see where you can cut out on extra expenses like shopping, personal care, or eating out. Doing so will help you be mindful of your expenses and teach you how to live within your means.
You can also try to take on a second job – not only will this supplement your income, but it could also help you reduce some expenses, such as entertainment expenses.
Aditi: I get it now – while I haven’t been wasteful with money, I also have been financially irresponsible by not saving enough for my future goals. I’m going to change the way I look at saving money right away. Thanks, Arvind!
