Pay yourself first is an investment an personal finance concept that was put across by George S. Clason in his best-selling book, The Richest Man In Babylon.
The concept has become the cornerstone when it comes to saving and investment planning all over the world. Many financial advisors encourage people to use it and it works.
What it means
Paying yourself first means putting away money for your personal finance growth before you pay any bills or make purchases.
It means making you the high-priority bill. You have to pay yourself before you pay anybody else.
Paying yourself first means saving and investing a certain percentage of your income every month before you start spending it.
Do people do that?
Many people rarely use this concept. They pay everyone else first and they last.
Many people get income at the end of every month and they start paying their bills and buying different consumer products. After paying all their bills and buying these commodities, they then save what is left.
The problem is that after these spending, nothing is usually left for many people to save and invest.
People will always have wants. If saving and investing is not a priority, you will end up buying even what you do not need. You will buy products based on a mere desire. In this way, you will spend even what you were meant to invest in for the future.
To many people, paying themselves first does not make sense. This is because they reason too much. How can they save before paying the landlord? How can they save before taking away their monthly expenses? It does not make sense to an average mind.
Successful people succeed by putting themselves first. Their financial growth is important than the good feeling of clearing their bills on time. They would rather and invest and suffer than be happy in the short run and stagnate in the same financial position.
Robert Kiyosaki, in his book Rich Dad Poor Dad, elaborates on the concept. He explains how he always pays himself first and bills last. Here is an excerpt from the book
Now I can hear the howls from those of you who sincerely believe in paying your bills first. And I can hear all the “responsible” people who pay their bills on time. I am not saying be irresponsible and not pay your bills. All I am saying is do what the book says, which is “pay yourself first.” And the diagram above is the correct accounting picture of that action. Not the one that follows.
My wife and I have had many bookkeepers and accountants and bankers who have had a major problem with this way of looking at “pay yourself first.” The reason is that these financial professionals actually do what the masses do, which is to pay themselves last. They pay everyone else first.
There have been months in my life, when for whatever reason, cash flow was far less than my bills. I still paid myself first. My accountant and bookkeeper screamed in panic. “They're going to come after you. The IRS is going to put you in jail.” “You're going to ruin your credit rating.”
“They'll cut off the electricity.” I still paid myself first.
“Why?” you ask. Because that's what the story The Richest Man In Babylon was all about. The power of self-discipline and the power of internal fortitude. “Guts,” in less elegant terms. As my rich dad taught me the first month I worked for him, most people allow the world to push them around. A bill collector calls and you “pay or else.” So you pay and not pay yourself. A sales clerk says, “Oh, just put it on your charge card.” Your real estate agent tells you to “go ahead the government allows you a tax deduction on your home.” That is what the book is really about. Having the guts to go against the tide and get rich. You may not be weak, but when it comes to money, many people get wimpy.
This is how many people reason. They cannot understand how the concept can be applied in our day to day lives.
There are several ways of making sure that you pay yourself first:
Reduce your expenses
This is the single most important tip in paying yourself first. You have to cut your expenses to make sure that they do not eat into your savings.
If you try to save without cutting your expenses, you will always take from your savings to finance your high spending. Cutting your expenses means that you have more money to save and invest.
To reduce your expenses, you have to first identify where your money is going. This will unearth what consumes a big part of your income.
You can then cut these expenditures by a certain percentage. You can move to a cheaper house, sell your car and buy a smaller one, take your kids to a less expensive school, reduce your entertainment budget and so on.
Open a savings account
You need to have an account where you will be depositing your savings. The account has to be offering an above-average interest rate. This will make sure that your savings are not eroded by inflation.
This account should probably be a fixed account to avoid withdrawing money for expenses during hard times.
Automate your savings
You need to make sure that you remit the savings to your account by automating them.
You can give an order to your bank to deduct the specified amount of money from your income and deposit it in your savings account.
This will relieve the hassle of having to bank every month. It will also enforce your discipline of saving.
Send certain incomes directly to your savings account
You should have multiple sources of income (MSIs). You can then decide to send income from several of them directly to your savings account. That is income that you set aside to invest.
You ought to start small and grow gradually. You can begin by putting away just 10% of your income to the account. As you develop more financial discipline, reduce your expenses, and grow your income, you can increase this amount.
You can even save 80% of your income over time. It is very possible.
Paying yourself first is a strategy that you ought to adopt. It is a sign of self-love and a commitment to your financial growth. It has to be observed.
Do not pay everyone else and forget to pay yourself. Pay yourself first and everyone else from what is left. This will give you the motivation to work harder to service your bills.
If you continually pay yourself first, you will never be poor.
Founder/ C.E.O- Wealthy Wolves Consulting & Giimark Ltd/ Best-selling Author/ Speaker.