My Tips Towards Wealthy

Tuesday, September 21, 2010

Pay Yourself First

One of the basic advice of personal finance management is pay yourself first. All the financial books and personal finanace management blogs tell you to practice this.

But the truth is, it’s really hard. We can find hundreds of reasons like pay the phone bill, pay EMIs, buy a new LCD TV etc. We have tried this once or twice in the past, but it’s so easy to neglect this. Usually what may happen is that we never keep track of our expences, so when payday rolls around, there won't be any thing left with us.



Now what does “pay yourself first” actually means?
To pay yourself first means - Before we pay our bills, before buying any groceries, before doing anything else, set aside a portion of our income to our investments. We can put the money into Mutual Funds, RDs, PPF, ETF or Stocks. The first bill we pay each month should be to ourself. If we can develop this habit, from our earlier stage of our carrier, we can build good corpus of wealth.

Why pay yourself first?
When we are young and just started our career saving may be very difficult. We are attracted towards latest mobile phones, accessories, movies, garments, student loans etc. Here we may like to save but nothing may be left with us, and here is the problem because we all may think of saving with what's left over - left over after consumer life style.

Here are few reasons to start saving now instead of waiting for next months salary.
  • Pay yourself first, gives a priority towards savings psychologically. Here we are telling ourself that we are more important than the mobile company or the movie producer. Building savings really motivates and enpower us.
  • Paying yourself first encourages good financial habits. Most people spend their money in the following order: bills, fun, saving and hence when it comes to saving usually nothing would be left over. But if can bump up saving to the front ie saving, bills, fun - we would be able to put the money into investments before we find some reasons to spend it.
  • By paying yourself first, we are able to achieve our goals. We can use the saved money to deal with any emergencies in our life. We can use this money to purchase a house, meet our kids education, marriage, use it to save for our retirement. Thus paying yourself first is help us to attain financial freedom.

How to ececute the pay yourself first plan.
The best way is to make it automatic. Start a SIP in a good equity diversified mutual fund via ECS on the first week of every month. Then we may not feel, we are missing anything from our pay check. Also we feel very happy to see our investments growing every month.

Try to set different SIP for different goals like buying a house, going for an abroad tour, purchasing a new car, kids education etc. Here are three easy ways to begin doing this yourself:
  • If the employer offers a retirement plan like EPF contribute as nuch as possible onto that.
  • Start an ELSS or PPF. This allow our investments to grow tax-free. Because of the extraordinary power of compound interest (and compound returns), regular investments in an ELSS or PPF from an early age can lead to enormous future wealth.
  • Open a SIP in a good diversified equity Mutual Fund Scheme on first week of evey month. Set up ECS transfers into this SIP. You can do DIRECT investment into MFs. This will save the broker charges. If you have more than one SIP try to split the SIP dates on different weeks of a month, as this will help gets most out of the time average concept.
Example: My wife is a perfect case study. She started by having 20% of her gross income set aside in an ELSS plan. This will save tax and can be used later to meet some goals. Later she increased that to 40% for another goal. How did she do this? By paying herself first. Because she never saw the money in her accound, she never missed it. Now her salary increased, and i expect that Chris will come to me one other night for advice on how to save even more. My wife is awesome and i love her!!.

Further Reading
No matter what our age, we should make it a priority to develop a regular savings plan. If we can make this as a habit from our starting of our career we can increase the financial security later in our life. Oh dont worry that i am late, but should start to do our best to pay ourselves first. I didn’t begin doing this until just a few months ago. Better late than never.

Pay yourself first, my friends. It’s a habit that you will never regret. 

2 comments:

  1. What I have learned so far is if you can drive a wedge between your increasing earnings and the increasing costs of your lifestyle, and then save and invest the difference, you can continue to improve your lifestyle as you make more money.

    ReplyDelete