Pay Yourself First

The simplest way to budget

Have you ever wondered why at the end of the month you have very little money saved? Or, maybe you were going to put money away in your savings at the end of the month, but then wonder why there is little to nothing to put away?

Both situations are common. Even before a pandemic and a resurgence of inflation struck, it was widely known that nearly 4 in 10 Kiwis were living “pay check to pay check” – a number that’s surely got worse. The same research found that only 20% of Kiwis would be able to cover their living costs for just one week if they lost their job.

There is a simple method to breaking this frustrating savings issue: pay yourself first.

“Pay yourself first” is a popular phrase and strategy in personal finance that means you are automatically designating money from each pay check at the time it is received to your savings, investments, retirement fund, or other avenues that help you build wealth. It might better be described as “pay your future self first”.

The concept is a simple one: that money goes towards your financial goals first, before paying any monthly bills, debts, or using it for any spending.

Sometimes, the pay yourself first strategy may also be called “reverse budgeting”. This is because instead of prioritising your money around bills and debt, it’s based on your retirement and savings goals.

Why Do It?

For many of us, after meeting all our expenses (food, tax, transport, power, phone, rent/mortgage, debt, student loans, etc) there never seems to be enough left to invest or save.

That’s why the pay yourself first method is critical. Most people try to save money based on whatever might be leftover, instead of a set amount first. When you switch to the pay yourself first strategy, you have a much better chance to reach your goals and stick to it when you see progress.

Prioritise Your Life

“The main thing is to keep the main thing the main thing” Stephen Covey, bestselling author of The 7 habits of highly effective people

This method of money management teaches prioritisation – your major life goals come first. By taking control over your money, and starting to take small steps towards big goals, you’ll soon feel more confident and assured. This can be a huge motivator and no longer will you be lumped into some of those dismal NZ statistics about money.

How to Pay Yourself First

Simple: create automatic transfers from your regular bank account to a savings account. Once you’ve built up enough of a cash buffer to cover any emergencies, consider investing instead – perhaps in something simple and flexible like a managed fund.

In addition, if you’ve got a “side hustle” or have any source of part-time income, irregular bonuses, employee allowances, or anything of the sort, try to save or invest all of it that you reasonably can.

(That said, if you have high interest debt, like credit card debt, then it’s nearly always a good idea to commit yourself to repaying that first).

In a small way, most employees already do this by making a small contribution to KiwiSaver from each pay check.

Adjust to Suit

Aside from KiwiSaver, once you get a good habit going, you can take a bit more time to really think about a set of goals – maybe splitting them into short, mid, and long-term. Even if your goals are very straightforward, knowing these and creating a plan will help solidify the habit of paying yourself first. Plus, depending on your goals and the plan to achieve them (such as “save $X,XXX per month towards a house deposit of $XX,XXX in X years”), your savings rates may need to be adjusted – you may get more aggressive cutting expenses to save even more. Being methodical with your approach will help you stay motivated and stay on the right track.

Great Theory, but Is It Realistic?

If someone is in the habit of paying themselves last, it might be a challenge to imagine how whipping $100 out of a regular budget is realistic. Many people worry that paying themselves first means running out of money later – if you’re struggling to keep up with your current lifestyle, how can you afford to pay yourself first?

The answer is simple: just do it.

If that means that at the end of the monthly or fortnightly pay cycle there’s a little scramble to meet any unpaid bills, then so be it.

In the famous book, Rich Dad Poor Dad, the concept of paying yourself first is one of the most important practical tips about getting started. The self-made multi-millionaire author, Robert Kiyosaki, encourages discipline and learning the habit to pay yourself first, even if you’re short of cash – he takes this to the extreme and says that even if you have to find ways to earn more because the Inland Revenue are chasing you, that’s a good problem to have as it’s motivational. Kiyosaki, a former US Marine helicopter pilot and Vietnam War veteran, says it’s all about discipline:

“The power of self-discipline. If you cannot get control of yourself, do not try to get rich. You might first want to join the Marine Corps or some religious order so you can get control of yourself. It makes no sense to invest, make money, and blow it.”

This is because Kiyosaki knows that no matter how good your intentions are, if you don’t pay yourself first, you’ll wind up putting yourself last. No one wants a future lifestyle that’s paid for with leftover change – we want to live our best lives now and in the future.

The Sum Up: Pay Yourself First

The earlier you establish this strategy with your money, the better financial life you’ll have. Whether it’s paying yourself $50 or $500 before you do anything else with your income, set up an automatic payment today. As you start to see your money grow, you’ll naturally become more motivated to pay yourself more, or at least get comfortable with the idea of gradual increases!