The pay yourself first philosophy explained
You have probably already heard the phrase “pay yourself first” from rich people before, but what does it mean? They are talking about a financial habit that should be hardwired in you if you want to increase your wealth.
If you are new to finances and are starting to manage your money, this article is for you. I set myself up for the task to analyse what the pay yourself first philosophy is all about.
What does pay yourself first even mean?
As a result of my preliminary research I found that paying yourself first means that as soon as you receive any income you set aside a determined amount to pay to your investment/retirement/savings account before paying your bills or spending the money on necessary items like food.
It sounds a bit counterintuitive but that is exactly the point. It is a proven strategy to achieve financial goals such as saving money for retirement.
With that being said, this first approach doesn’t strike me as such a sensitive thing to do financially. I mean, saving money is a good habit, but saving money by itself brings no financial advantage whatsoever.
I will explain more about this later, for now let’s keep learning what the common knowledge about pay yourself first tells us.
Why is it important to pay yourself first?
The real importance of this practice is that it teaches you “reverse budgeting” which means that instead of paying off bills and expenses first and then save whatever little you have left, you do the opposite.
You pay your savings account first and you manage the rest of the money to cover your expenses and pay your bills.
This is a basic strategy to start managing your income and you will find that many financial experts recommend it. Whatever amount you want to pay yourself first will depend on the health of your finances and your income but most experts recommend that you start with at least 10%.
Does that mean that bills are not a priority?
Yes and no, you should always fulfil your commitments and obligations, otherwise you will go into debt (if you’re not already there) or worse.
It simply means that you need to examine all your expenses and make changes where needed.
Sometimes the tiny expenses are adding up at the end of the month and you don’t even notice. If you pay yourself first, you basically change the order of how you use your money and manage it more efficiently.
How to pay yourself first when you are in debt
If you are in debt you might think that this strategy will not work for you, because you have to pay your obligations first. However it can be applied for people in debt. It all depends on the type of debt that you have.
Experts recommend that if you have to for example pay a credit card loan with high interest rates, you pay it off as quickly as possible (one year or less).
But if you have a long-term low interest debt like a 30 year mortgage, it doesn’t make sense to wait until you finish paying it off to start saving.
How to pay yourself first when you have a low income
What I don’t like about financial advice is that often it’s often based upon the assumption that you have a job with sufficient income.
Yet in my experience, chances are if you are starting to learn about finances it is because you are tired of not being able to make ends meet.
Now I am going to share with you my personal strategy on real time, because I currently have the worst paid job in history: Housewife.
I have decided to start paying myself because I value my time and effort, and it is after all a job like any other, so why should I do it for free?
To determine the amount I can afford to pay myself I have run a cold and thorough analysis of my personal and household expenses for the last 2 months. I have kept track of everything that is payed from my bank account whether it is food, bills, a dentist visit or even the occasional hot chocolate.
As a result of my analysis, I have made two important decisions:
One: I will set aside 10% of my income to invest in a long-term fund of middle risk that is supporting green initiatives.
Two: I will pay myself a “salary” made up from 17% of my income for my work-hours cleaning, cooking and doing laundry. That is equivalent to 10 hours of work as a housekeeper with the minimum wage in Germany.
That means that I only need to work 10 hours a month in that job. The rest of the time I plan to spend being a mother to my child (spending time with him and not doing chores) and working on my own projects to generate income such as freelance writing and proofreading. If you want to hire me take a look at my profile here.
With this strategy I project to be able to establish an small capital to invest in upcoming projects for the next year.
Now that I have shared my strategy with you and we have learned what common knowledge has to say about paying yourself first, let’s take a look at an expert’s perspective.
Saving money or making more money?
After doing all my research to explain the pay yourself philosophy, one thing became inevitably clear to me:
It is not about how much money you can save, what you really need is to generate more money!
I can think of a million ways of cutting down expenses to save up some money, but being trapped in a low income situation is what ultimately keeps us trapped in “the rat race”.
You know who I remember the phrase “pay yourself first” from? A rich man called Robert Kiyosaki. And if you ask him what it means, he will definitely tell you, I quote:
Essentially what he will tell you is the same conclusion that I arrived to: You have to increase your cashflow and to do so you need to invest in money generating strategies.
If you want to learn more about this, please read Robert’s article in the link above.
My conclusion
The paying yourself first philosophy is a helpful tool to change your mindset and that is key if you want to improve your finances.
It can be very useful to start putting your finances in order and to save money if you need to build a capital to start investing.
The real worth of paying yourself first is not in function of savings but rather in function of using that money to increase your cashflow.
Another positive outcome of paying yourself first is that you start to value your time and effort with your own scale and not the scale of an employer therefore opening the doors to financial self-determination.
Please let me know if this article was helpful and what you think about paying yourself first. Thank you for reading.
