Understanding “Pay Yourself First”

“Pay Yourself First” means prioritizing savings and investments before spending on other expenses. This concept emphasizes setting aside a portion of your income for savings and investments as soon as you receive it, rather than saving what is left after expenses. It’s akin to the analogy of exercising in the morning for health benefits, where prioritizing savings early builds financial health.

Why “Pay Yourself First” Works

Psychologically, many find it challenging to save because we’re accustomed to spending money. By automating savings and investments, such as directing a portion of your paycheck into assets like mutual funds, stocks, or real estate, you ensure consistent wealth-building. Starting with at least 10% of your income is recommended to establish a saving habit.

Steps to Wealth through “Pay Yourself First”

1. Calculate Mandatory Expenses: Determine your essential monthly expenses.

2. Determine Savings: Decide how much you can save from your income, aiming for at least 10%.

3. Automate Investments: Set up automatic transfers to investment vehicles that offer growth or generate passive income, like dividends or rental income.

4. Build Passive Income: Over time, accumulate enough passive income from investments to cover your expenses. This stage, known as Financial Independence, reduces reliance on active income.

5. Reinvest for Growth: Once financially independent, reinvest earnings to acquire assets generating additional passive income, further accelerating wealth accumulation.

Savings Equation

• Income – Expenses = Savings: Instead of budgeting what’s left after expenses, prioritize saving first.
• Expenses – Income = Savings: Avoid relying on credit or loans before receiving income, which can lead to debt dependency.
• Income – Savings = Expenses: Optimal formula where savings are a deliberate choice, fostering a saving habit essential for wealth creation.

Conclusion

Saving is a habit comparable to spending, and choosing to “Pay Yourself First” transforms financial habits toward wealth creation. By committing to saving early and consistently, you establish a foundation for financial security and growth, regardless of economic conditions.