Do you make a habit of allocating 10% or 20% of your income to a savings account or an emergency fund?
You might want to make it your goal this 2021 if you haven't yet.
This habit is one of the most highly recommended SMART financial goals. Some even consider this the easiest way to become a millionaire.
And why not? After all, the idea is to spend less and save more. If the goal is to save $10,000 in a year or two, you're highly likely to achieve this if you diligently deposit money into your savings account.
But...what if your income is insufficient to allow for such an endeavour?
You have debts and bills to pay. You have mouths to feed. Your income is almost always tight.
What if we tell you there’s a way to spend and save money at the same time even when funds seem lacking?
It’s all about setting goals, creating a realistic budget, and developing the right mindset and habits. We’ll show you how.
Before anything else...
You should think practical before you get started with this particular goal. That is, if you have high-interest debts, then paying them off should be a top priority than anything else. Seek help for debt management if needed. Credit counselling agencies, for example, help you work out debt management plans.
The best course of action, in this case, is to create SMART goals to pay off your debt. Make sure you have a specific target that is achievable and supported by realistic numbers based on your personal finances.
What Does It Mean to Pay Yourself First?
It means paying for your future by funnelling money towards your savings account, buying life insurance, or saving for retirement. The focus is on your financial well-being in the long term rather than your immediate needs.
It also means saving for planned large purchases. Rather than scramble at the last minute to pay for a new set of tyres, you save for them early on or until you’ll have to replace them.
By paying yourself first, you’re assured that you’ll have the funds you need when you need them.
How do you benefit from paying yourself first?
Aside from the obvious fact that you’ll have a financially sound future, developing this financial strategy comes with several advantages.
- Develop a savings habit that will help you accumulate a huge savings balance.
- Create a cushion for when financial emergencies occur, such as unexpected medical expenses.
- Build a nest egg for a secure and better future.
- Avoid the stress that comes with unexpected spending or a lack of funds.
- Enjoy peace of mind. Seeing your savings balance grow has that kind of effect.
- Encourage sound fiscal habits. You can turn from spender to saver in no time.
- Help you break away from the vicious cycle of living from paycheck to paycheck.
With these benefits, it’s no wonder that many financial planners consider paying yourself first a golden rule.
Strategies to Pay Yourself First Even When it Seems Impossible
We’ve arrived at the most important part: the HOWs of this particular financial habit. Since it seems your income isn’t enough, there are some things you must first understand.
- Expenses are categorised as Mandatory and Discretionary
- Mandatory expenses are the bills that you must pay every month such as utilities and the things you need at work.
- Discretionary expenses are variable costs that you think you need to spend money on but don't have to. Do you really need to pay for that gym membership or cable TV subscription? Do you have to eat out or order food, or can you cook at home?
- Pay yourself first follows a reverse budgeting strategy. While most people save what is left after all expenses have been paid, you do the opposite.
- To succeed in this financial strategy, you must develop a savings habit even when you have debts and bills to pay.
What do all these mean?
- Cut down on discretionary expenses and you'll find your extra funds. Take a long hard look at your spending to see where you can make room for savings. Use the extra amount to pay yourself first.
- Make savings and investment a mandatory living expense. By treating your savings as a bill you must pay, it will become a necessity rather than just a desire or plan.
- Reverse budgeting dictates that you pay yourself first before you pay everything else. Doing so ensures there’s still something left for yourself.
- Start conservatively. This is especially important if you have debts that are better paid off first. Once you're debt-free, you can then increase your savings.
- Follow the 50/30/20 approach when possible. 50% of your monthly income should go to necessities, 30% to wants or discretionary expenses, and 20% is paid to yourself first or paid to debts. Say you earn $3,000 per month. Allocate $1,500 to mandatory expenses, $900 to your wants, and $600 to savings or debt repayment.
- Create a SMART savings goal. Whether short term or long term, make sure that your goal to save money is specific, measurable, achievable, relevant, and time-bound. This makes for a highly attainable financial target.
Most importantly, regularly review your personal finances and adjust as needed. This is how you'll see whether you're on track, or you may need to scale back because you're short on funds.
Learn how you can run a proper financial inventory from the blog Starting the Year Right: What Your January Financial To-Do List Must Include
Cultivate the "Pay Yourself First" Mindset
In its simplest form, this financial strategy only requires that you pull your savings from the top of your income and then use the rest to cover everything else.
Since your financial situation might not be as straightforward, follow the tips above on how to develop a mindset where you pay yourself first. When you do, developing the system to implement this financial strategy will easily follow.
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