Last week I wrote a post on how to make a simple budget every paycheck in under 15 minutes. Although a budget is one of the first step to financial health, it’s not the most impactful one.
I’m about to reveal a financial habit that you heard many, many times, but that you’re most likely not implementing in your life (yet). The financial habit is : Pay yourself first.
This habit can change your life. No more living paycheck to paycheck. No more dreams of vacations that you need to postpone to next year. No more financing every time you need to buy furniture and appliances.
I’m sure that this sounds like music to your ears. You just don’t know where to start. How can you go from theory to practice? That’s exactly what I’m going to explain in this post!
Impact Of Paying Yourself First
Paying yourself first enables you to start saving. This sounds pretty boring, but imagine how different your life would be with $5,000 in your savings account. Not convinced?
- Your car just broke down and the reparation will cost you $1,000. You pay with your credit card and will reimburse that amount over the next 2-3 paychecks right? No! You have an emergency fund, so no stress, just pay the reparation right now.
- Work was hard in the last month and you really feel like you need a vacation. Your partner can take some time off as well. You really want to go to Italy for 2 weeks, so you will finance the trip : $600 per month for the next 6 months, right? No, this would be terrible! Instead, you can use the money you already saved and stop enslaving the future you.
Paying yourself first changes your life completely because it gives you freedom. Freedom to absorb unexpected expenses and to enjoy unplaned activities. You will not be relying solely on your next paycheck, and that will remove so much of your stress.
Assess The Current Situation
Is your Net Income positive? In other words, do you have money left at each paycheck after you’ve paid all of your expenses? If you don’t, or if sometimes it’s positive and other times it’s negative, you need to change your strategy. Your Net Income should be positive all the time.
You can fix the problem by either increasing your revenue or decreasing your expenses. Searching for a new job that pays more or cancelling services are examples of what you can do to bring your Net Income back to positive territory.
Having a clear process on how to do this rather than doing it randomly is highly beneficial. Paying yourself first is essentially shifting your perspective and clarifying the process for you.
Paying Yourself First
Everybody understands the words “pay yourself first”. It even sounds too easy to make a real difference. Could the reason that you’re living paycheck to paycheck really be that simple?
Paying yourself first implies more than what it looks at first sight. It’s a flip in your way of thinking, a complete 180 on the your perspective.
Our mind sees all the expenses coming in and naturally blame them for our money problems. By saying that you will pay yourself first, you commit to always put yourself at the top of the list. The you from the future has sent you a bill that you have to pay now.
With this perspective, instead of thinking about how you will pay all your bills and then save, you start thinking about how you will save and then pay your bills. You prioritize yourself versus all others that want your money. This will naturally lead you to question some of the expenses you have and whether you can get rid of them.
To finalize the process, commit to consistently save an amount or a percentage of your paycheck. Wathever amount you decided to save, divide it by your total paycheck amount. That ratio is called your savings rate.
Most financial advisors and books claim that your savings rate should be at least 10%. Mine is consistently in the 25-30% range. Find the range at which you are comfortable, commit to pay yourself first, and I guarantee that it will pay off!
2 Books on Paying Yourself First
Even if the majority of people do not pay themselves first, there are many books available on the subject. These books will go more in depth in the subject if you are interest to continue your reading.