Pay yourself first – we thought we’d start off the year with a quip that’s often said in regard to things financial and yet many people aren’t that sure exactly what it might mean for them. Is pay yourself first a phrase for business owners? Or is it something with broader appeal? Let’s look.
In many respects, the term pay yourself first is about your goals (and let’s face it, goals are especially on trend at this point in the year) and they can be your business goals or otherwise.
What pay yourself first might look like
According to many government and news sources, Australians have done pretty well at saving in 2020, almost by accident, primarily because there wasn’t a lot on offer to do outside the home, especially if you were in lockdown. And so you might have arrived at 2021 with a bit of extra cash in the bank. Good for you.
The trick is to continue to maintain that level of savings and add to it over time. And that’s where pay yourself first comes into its own. If your income is largely unaffected or heading back to its regular levels, now might be the time to think about how best to ensure you remain focused on your financial goal.
“Um, wait…what financial goal?” you might be saying. If you never had one in the first place or you’re up for a new one, it might be worth spending a bit of time coming up with something that feels right to you. It might be to;
- pay down your credit cards
- pay down (or off) your mortgage
- save for a home or investment property deposit
- create an emergency fund of at least three, preferably six months savings (see Lessons from Barefoot)
- buy some shares
- building up/topping up your superannuation nest egg – particularly if you’re heading in the direction of retirement in the next 10-15 years.
Or filling whatever financial gaps you can see in your life.
How to get started with pay yourself first
Most people get this next step a bit backward in that they pay their bills, living expenses, etc first and see how much is left. And then they think about maybe saving it. And let’s face it, when you do it that way, the bills and the every day purchases seem to stretch to eat up any available money.
But when you organise to pay yourself first, somehow the remainder of the money seems to do just as well. Magic!!
So, with your goal in mind, how much money could you realistically put aside each week/fortnight or month (depending on when you get paid)? $50, $100 or $1000. Again, how much that number is depends on your particular circumstances and the goal you’re aiming for. It can be pretty stressful to put away so much of your take home that you’re really struggling to make do. So really think about how you currently spend, where you might trim a bit and start there. You can always up it in 2-3 months time.
Ask your manager/HR/boss to split out your pay into two accounts – your regular bank account for your living expenses and an account associated with your financial goal. If you don’t see it as ‘spend-able’ money (just like super whilst you’re younger), you’ll tend not to touch it.
Just make sure that wherever you park that money (if it’s not paying something like a credit card down immediately) isn’t easily available to you – a bank account that doesn’t have an EFTPOS card associated with it, or a deposit account that you can’t withdraw from easily or have it go straight to your credit card account or your super. That way you’ll be less likely to spend it on something not aligned to your financial goal.
Before you know it, you’ll start building up reserves into that account or seeing debt disappear. And that’s a very powerful way to start the year.
Although, at first glance, it might seem like 2021 is determined to continue in the same footsteps as 2020, if you think about it, collectively we’re better placed now than this time last year. Covid pretty much hit all of us for a six. However, it’s no longer a shock to us either personally or to our businesses – which isn’t to say some of us aren’t still dealing with the fallout from it – but rather we’re getting on with whatever needs to be done, in whatever circumstances (lockdown, border closures or otherwise) Mother Nature and our leaders throw at us. We’ve figured out how to weather the storm so much better now. We wish you all the very best for a productive and prosperous 2021.
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