Pay Yourself First

Do you have a full-time or part-time job, and you feel like you are saving only a little money? Of course, you have your fixed expenses like paying for your roof and utilities. You also need to do groceries. Next to that, you may have some personal expenses such as your gym membership, weekly dinners and food delivery, an expensive tasting box of alcoholic drinks, new clothes, the movies, and perhaps also a Netflix account.

Some months you have money left that you can save, and this is often an exception instead of a rule. This leads to outcomes in surveys that show that less than 4 in 10 Americans can pay a surprise 1000 dollar bill from their savings. But also the Dutch aren’t that financially comfortable, 1 in 7 persons practically don’t have any savings. That is a problem.

If you want to turn around the feeling of having a piece of the month left after you’ve spent your salary, the key is to have insight into your costs. And most importantly, as The Richest Man in Babylon argues: you need to pay yourself first.

Let’s start with an example case where someone earns EUR 2700 net a month. Your rent/mortgage and utilities are 1300 and groceries are 400. Then you know you have around 1700 in more or less fixed expenses a month, which translates to EUR 1000 at your disposal every month.

Wanting versus Needing
In the process of spending money, it is important to keep in mind that there is a difference between wanting to spend and needing to spend money. Generally, people carry the feeling they can spend their full discretionary amount, as they have earned this through hard work. This doesn’t mean you need to spend it all on the products and services of third parties.

… as The Richest Man in Babylon argues: you need to pay yourself first.

You can prioritize your spending. If you find it important to exercise and live a healthy life, then a gym membership and healthy food are obvious. In case you find it valuable to enjoy weekly dinners, expensive alcohol, and food delivery then this will receive more priority. Or suppose that you’re a fashionista, and you like to buy new clothing regularly which becomes a priority on your list.

Every person has different priorities, and that is okay. However, it can be sensible to consider whether you need those enjoyments at your current frequency. And to try alternatives such as exercising at home or in the open air, cooking at home, and buying new clothes that you’re going to wear at least once a month, as your money will be long gone before you’re able to send money to your savings and investment account.

Let’s turn this around. Instead of paying others first, try to pay yourself first by sending money to your savings- and investment account. With the remaining money, you can go ahead and have that fancy dinner, go to the movies, or buy that Prada you wanted all winter.

Although the money on your savings account will lose value in time due to inflation, it is sensible to have an emergency fund to be able to fix or replace your equipment if they break, pay for medical costs, and for bridging unexpected unemployment.

Investing periodically via an investment account can be a good habit to improve your financial position over time. By investing in line with your financial goals, aside from having a saving account for emergencies, you can build your wealth. And you are certain to build wealth if you take your discretionary amount and pay yourself first, before flowing this money to third parties. It should be more evident to pay yourself first. You worked hard for your money. You earned it. Thus, it’s only natural to pay yourself first before sending your money to the gym, the restaurant, the brewery, your clothing retailer, the cinema, and Netflix. Right?



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Financial Moments

Financial Moments

Your 3 minute reads on the economy, personal finance and investing.