“Pay yourself first” is a well-known phrase, but where does this personal finance concept come from? One of my all-time favourite books on investing introduced this concept almost 100 years ago. The Richest Man in Babylon is a transformative book that has changed the way millions of people think about money since it was first published in 1926. In the book, George S Clason shares the story of Arkad, a successful Babylonian who became wealthy by following the principle of paying himself first. He advised that “A part of all you earn is yours to keep. It should be not less than a tenth no matter how little you earn, but it can be as much more as you can afford. Pay yourself first.”
The idea is simple: You set aside a portion of your income for savings and investments before you pay your bills or spend money on discretionary items. By doing this, you’re putting your financial future first and progressing towards your long-term goals.
We are taught to pay our bills first, so the idea of paying ourselves first may seem counter-intuitive. But it just takes a shift in mindset. Here are the main reasons why I pay myself first every month, including any ad hoc income I receive:
It helps prioritise your goals
When you pay yourself first, you are prioritising your own financial goals over other expenses. This means that you are more likely to make progress toward your long-term goals, such as saving for retirement or buying a house. By setting money aside for savings and investments first, you’re making these goals a priority and ensuring that you have the funds to achieve them.
It reduces the temptation to overspend
By waiting until the end of the month to save money after you’ve paid your bills and spent money on discretionary items could result in nothing being left over. This can lead to overspending and a lack of progress towards your financial goals. When you pay yourself first, you are taking the money out of your account before you have a chance to spend it on other things, reducing the temptation to overspend and ensuring you have the funds to achieve your financial goals.
It assists in building good financial habits
This principle can help you build good financial habits over time. By making saving a priority, you’re training yourself to be more mindful of your spending habits and to look for ways to save money. This can help you develop a more frugal mindset and become more disciplined in your financial habits.
It helps build wealth over time
By consistently paying yourself first and investing the money in assets that appreciate over time, such as stocks or real estate, you can build wealth over time. This can help you achieve financial independence and live the life you want without worrying about money.
So how can you pay yourself first? This is what I have done:
1. Make it a priority
To be successful with paying yourself first, you MUST make it a priority. You need to commit to the habit and make it a non-negotiable part of your financial routine. It can be helpful to remind yourself of your financial goals and the reasons why you’re saving money. This can help you stay motivated and committed to the habit of paying yourself first.
2. Start small and increase over time
If you are new to paying yourself first, it can be helpful to start small and gradually increase the amount you save over time. For example, you could start by saving 2% of your income and gradually increase it to 10% or more as you become more and more comfortable with the habit.
3. Use a budget
Creating a budget can help you identify areas where you can cut back on expenses and save more money. Once you have created a budget, you can set aside a portion of your income for savings and investments before you allocate funds to other expenses.
4. Set up automatic transfers
One of the easiest ways to pay yourself first is to set up automatic transfers from your bank account to your savings or investment accounts. This way, the money is automatically taken out of your account before you have a chance to spend it on other things. You can set up these transfers to occur on a regular schedule, such as monthly or biweekly. I have set up automatic transfers on payday to all my savings and investing accounts. Some apps like Franc invests the money automatically on my behalf. On other apps, the money waits for me to make an investment decision. Once the money is in my investment account, it never makes its way back into my bank account until retirement.
“Paying Yourself First” is a simple yet powerful personal finance strategy that can help you achieve your financial goals. By making saving and investing a priority, you are taking control of your financial future and building wealth over time. It requires discipline and sacrifice in the short term but, the long-term benefits are well worth it. Remember you are investing in your future self, so make paying yourself first a habit and watch your financial future reach new heights.
Rochelle Warries is a qualified chartered accountant with 16 years of experience and a seasoned stock market investor. Her passion is helping novice investors build healthy investment portfolios through financial education.