By Cleona Lira 24th August, 2015
Pay yourself first means to automatically route your savings from each pay check at the time it is received. It is a great money habit; it is powerful simply because great habits are powerful. You know habits are powerful – you probably brush your teeth automatically without thinking or lock your door when you leave your home for work. When it comes to saving or investing for the future, paying yourself first is an incredibly powerful habit to install.
The principle of this is simple. Grab a piece of paper and you can work this out in a few quick steps.
- How many hours did you work last week?
- What did you earn per hour, before tax?
- How much money did you put aside for your retirement?
- How much money did you put aside for investments?
Now add the last two up and based on what you earned per hour, work out how many hours did you actually work for yourself?
The idea behind pay yourself first is about doing it now, before you pay bills or groceries.
Why do it though?
- Paying yourself first enables you to take 100% responsibility for saving as your priority
- Now because there are always going to be reasons not to do it. There are always fun ways to spend money
- It is a great financial habit and a smart thing to do – save first, expenses/fun later
- When it comes to money & compounding, saving now is much better than a few years later
How to do this?
A few simple ideas to get you started:
- Look around for a high interest bearing savings account, save a cash emergency fund here of at least 6 months outgoings.
- If you have a pension available, make sure your contributions are automated. Matched contributions by an employer are free money, do not leave this on the table. If you don’t have one, look into setting this up.
- Look to save monthly into an ISA, try to utilise your ISA allowance fully each year.
Things that may get in the way
One of the issues that may get in your way is thinking you do not have enough funds to put away. Put away as much as you can afford to now…it is the habit that is important to install. Once you get used to not having this sum and your circumstances change, you can always look to increase this amount.
Just do it! Don’t get in your own way.
Resolve to pay yourself x number of hours pay each week.
Other resources to read
I love the work of Charles Duhigg, author of The Power of Habit: Why We Do What We Do in Life and Business and connect you to this great infographic which explains the relationship between cue, reward and routine.
Hope you enjoyed reading my blog.
If you are looking for advice from a London IFA, please feel free to get in touch.