Pay Yourself First

Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.

Ayn Rand

I talked recently about the effects of debt on your pocket book, and more specifically about how credit card companies and bank loans can have you paying twice or sometimes even thrice the price of the item you initially bought.  It was not a pretty picture, but I hope it was informative.

While avoiding debt is certainly one of the most important things you can do with your money and, in fact, even with your life I would venture that paying yourself first is even more important.

Paying yourself first?  I don’t pay myself anything, my employers do!

And that’s the problem.  Most people view their pay-cheque as being paid by someone else– which is certainly true in a lot of cases.  They get the money deposited bi-weekly or monthly into their bank accounts and they spend it however they see fit.  For most, it goes to bills first, then rent & food, and then the rest goes to entertainment.

But what about savings?  Most people I’ve met don’t bother putting anything to savings, spending their whole pay-cheque on the necessities and then themselves.  The amount of people out there living from pay-cheque to pay-cheque is astonishing.  If you’re one of those people, I hope you take this article to heart.  I read this same advice when I was 15 and it changed the way I thought about money, and how I managed it.  Consequently I’ve always had more than enough for myself and those who depend on me.

So what I mean by ‘paying yourself first’ is that you take some money from every pay-cheque you receive, be it from a business venture you’re in, a side job or just a regular 9-5′er.  No matter how you get your money, take some of that out and put it in a savings account for yourself.

Simple.  Except for the ‘first’ part of ‘pay yourself first’.  What I am suggesting is that you take out 20-30% of every pay-cheque you get as soon as you get it and immediately stick it into savings.  So if you made $100 every week as soon as you got paid, you’d stick $20 of that $100 and put it directly into savings, then divvy it up for bills, food, rent/mortgage, entertainment.

Why on earth would I want to do that?  I don’t get paid enough as it is!

That’s a common reaction.  Most people don’t like the idea of having even less money to spend then they already have, especially if they’re barely squeaking by as it is.  But, there’s a very important reason you want to pay yourself first:

Interest.  Interest on a savings account when you’ve put a significant sum of money in it can be quite… well, significant.  Interest is what caused those credit card companies to make a killing off the hundred dollars you kept carrying over from month to month, but believe me when I say that it’s much more exciting when it’s working for you instead of against you.

Banks don’t pay a very handsome interest rate on savings accounts like you pay on credit cards.  It’s only when you start paying attention to the fact that banks offer you anywhere from 0.4% – 1.2% interest on what you’ve put in your account that you realize what an incredible rip off the 20% credit cards are charging is.  This is why, unlike a credit card, you need a more significant amount of money in your account in order to see a tangible return on your investment.

If you know where to put your money, that 1.2% interest can sometimes go as high as 3% or 4%, which when you’re talking about thousands of dollars, 3% or 4% a month can add up in a big hurry.

Essentially, by paying yourself first from your own pay-cheque, you are quite literally paying yourself due to the interest you’ll end up making on that money.  Believe me when I say that the best way to make money is through interest, because it is essentially money you are getting for free.  The only string attached is that you have to be taxes on the earnings, which you have to do for a regular income anyway.

Implementing the routine of paying yourself first

First and foremost, if you intend to put away 20% of your pay-cheque into a high interest savings account, then it’s a good idea to do it as soon as you get it.  Before bills, before food, before housing and definitely before entertainment.  Before you even touch the money, take 20% out and transfer it to a different account.

There are easy, painless ways to do this.  When I was still working a shift work job, every time I got paid I simply did a quick calculation to discover how much I should put away.  (So if I made $1000.00 I did 1000*0.20 which comes out to 200.)  So immediately I would put $200 away into savings and then divvy the rest up.  I had to do it this way because my pay-days were never the same.  Some weeks I’d make $400 and some I’d make $700.  It depended on what shifts I worked.  If you’re on shift work, this is the easiest way to do things in my experience.

However if you’re working a salaried job, it becomes infinitely easier.  You know how much you get paid each month since it’s always the same.  You work the same hours every week.  So, you do the same calculation I did above, replacing $1000 with however much you make in a month and set up an automatic transfer from your chequing account into the savings account of your choice.  Make the transfer occur 1 day after pay day, or even on the same day if your payment comes through early in the morning.

That way you literally don’t even see the money.  It’s hard to miss something you never see, and meanwhile that money you’re putting aside is not only providing a valuable buffer if anything every happens to your source of income, but making you money you don’t even have to work for through accrued interest.

Paying yourself no matter what

My article about debt said that you should avoid debt at all costs and that paying it off should be your first priority.  If paying off debt is item #1 on your list of things to do with your money, then paying yourself first is item #0.  No matter what, you should pay yourself first.  Even if you’re only paying yourself 10% of each pay-cheque, just put something away.  It will be there in case of emergency and it will start making you money.

Yes, paying off your debt is very important and will cause you to reduce the amount of interest you’re incurring every month, but you won’t be making any money in the mean time.  If you put something into savings and then pay off your debt you’re doing both– making money and reducing money that you’re spending.

Paying yourself first should be something you do no matter what.  I know how hard that can be when you’re tight on money and every dime counts, but it’s worth it at the end of the day, believe me.

Like pretty much everything I talk about on IEvo, if you’re not convinced, try it. You’ll probably be amazed at how fast your money adds up, and you’ll find yourself with more money at your disposal than you had probably ever imagined yourself having when you were spending everything from your pay-cheque as soon as you received it.

One Response to “Pay Yourself First”

  1. Dani says:

    My husband and I don’t put away a certain percentage of money, but when we have any more in our checking than is needed for bills and rent, we transfer it into savings, at least a few hundred a month. It helps to have something to save up for, at least for us. That’s what pushed us to move to a small, cheap place. Having a goal makes us work that much harder to reach it.

  2. [...] example, his article on Paying Yourself First discusses how you should take a certain percentage of money out of your paycheck to put into [...]

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