Pay Yourself First!

Pay Yourself First!

•  3 minute read

Financial literature contains a lot of peculiar expressions, such as "Pay yourself first." Read on to find out what that expression means and how to set yourself up for success by paying yourself first.

When I started looking into personal finance, one of the resounding pieces of advice that I heard was “pay yourself first.”

 

But I soon realized that “pay yourself first” actually meant, “save some money for yourself first.” Understanding the real meaning now made all the advice that I’d heard make sense.

Being reasonably practical minded, I thought, how do I pay myself? Do I work for myself? Do I get a paycheck for keeping myself alive? Do I pay myself for sleeping? Pay yourself first.

In simple terms, when you receive any money, before you do anything, you should take some of that money and put it into another account, or at home into a piggy bank.

Your total paycheck or allowance or commission is not your budget.

 

In the simplest of businesses, for example on a lemonade stand. For every glass of lemonade sold, you have the cost of the cup, sugar, and lemons. If you do not budget for those costs, you will not have any money later on to pay for more cups, lemon, sugar or have gas to pay your parents to go to the shops to buy supplies for you.

 

Like anything, we are adaptable to our surroundings or our situation. If we are at a sports game, we can shout and holler and support our team. If we are in a library, we can keep quiet. Even goldfish are adaptable and will grow to a size relative to their surroundings. The bigger the tank, the bigger the fish.

 

So with all these analogies, our spending habits can change or should change depending on how much money we have available.  If you have to cook a meal, and are given differing amounts to spend, your buying habits will change depending on your “budget”.

 

I think I have labored this point enough. Next point.

 

A simplistic example. If you earn $1,000 a month and took out $100 as soon as you receive that money, you would get used to only having $900 a month to spend. That $100 could be split into an Emergency fund and a Savings fund. Over the year, that $100 a month, now becomes $1200. That is now $1200 that is available to you, which can translate into $600 in your Savings and $600 for unexpected bills.

 

This has been achieved by simply changing your mindset and altering how much you actually spend each month. If you don’t have it, you don’t spend it. If you hadn’t adapted your spending, that $1200 would be unaccounted for and quite likely you could not actually pinpoint on what or where you had spent it.

 

To hit home further, someone I recently met said that $5000 was put into a mutual fund. Eight years later that $5000 had grown to $10,000 (look up the Rule of 72). So in essence over eight years, each dollar deposited had grown and now was worth $2. I will let you do the math, but the more you save now, the more you get in the future.

 

You can either work for your money or let your money work for you.

 

It is all about mindset and adaptability. Save first, spend second. As Warren Buffet says and I am paraphrasing – don’t spend first and save last. Save first and only spend what you have left, last.

 

(Paul Vasey Founder of Educational resource CashCrunchGames.com – helping teens improve their money habits and skills.)