Personal Finance: Pay Yourself First

The concept of “Pay Yourself First” sounds weird, beyond normal. The usual concept of savings is to spend so long as there’s cash in the wallet or ATM, with whatever money left considered as savings. This strategy appears sound — allocate a percentage for savings, control spending, then save what is left. But it’s not uncommon to end up saving nothing, using the usual strategy, primarily because by the end of the salary/pay cycle, all salary had been spent and nothing is left for savings.

Learning the “Pay Yourself First” technique is not easy. The concept is great, but the implementation is often difficult. It’s always tempting to spend more. Here are some pointers for those starting the journey to pay themselves first:

1. Determine how much you earn in a month

Include income from any sidelines, aside from your day job, in the computation. Just to be safe, do not factor in your 13th month pay and bonuses.

2. Make a list of all your expected expenses for the month

This includes rent, food and other fixed expenses. Don’t forget to factor in expenses that are not limited to a particular month, like car maintenance, registration and insurance, as well as personal insurance.

3. Set a cap for gimmicks and other “non-essential” expenses

Expenses for relaxation and having fun are, of course, necessary, as all work and no play makes you a dull, if not a dead, man. Still, these expenses are not as indispensable like your rent or food expenses.

4. Stash the balance somewhere safe

After you’ve determined the amount that you could save, immediately take it out of circulation. Stash it somewhere safe, not so much from others, but from yourself. This way, you limit yourself to your budget and remove the temptation of spending more because there’s still money in your wallet or ATM.

Based on the simplistic – but sound – characterization that everything that goes out of the wallet is an expense, the amount that goes out to personal savings could also be considered as an expense.  However, by paying yourself first ahead of others, you guarantee that something is left for the rainy days. We all know that no matter how rich or fortunate we think we are, the rainy days always come along. So, pay yourself first.

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