It’s one of the oldest rules in the book when it comes to personal finance: the concept of “paying oneself first”.
You might have heard it from parents, grandparents, friends, or perhaps never at all. I confess, prior to reading one of my favourite books, The Richest Man in Babylon by George S. Clason, it was not a saying I was familiar with.
What it means in practice is that when we get paid, prior to buying those tickets, a weekend away, or even the groceries, we move a little bit of money elsewhere – into a savings account or an ISA for example.
Thus, you have literally paid yourself. You will still have something to show at the end of the month after paying the bills, travel costs, and the multitude of other things that can crop up at any moment.
The idea can be summed up consciously by saying – the first bill you pay every month should be to yourself.
If we don’t do this, and we aren’t building up any reserves, what are we working for? Are we just working to pay bills?
When I first heard of the idea I thought it a bit too rigid. Surely I would be able to spend my usual, deal with any surprises and then simply save the remainder at the end of every month? Well in short, this did not work for me.
Nor does it work for most people. Something always comes up, resulting in there being less than our target amount to save at the end of the month.
So I switched to paying myself first and, whilst hard for the first month or two, it was incredible how easy and familiar this process became.
I began to enjoy my disposable income more as I knew that I had already hit my savings goals for each month.
And, after several months of discipline, I started to see a healthy surplus in the aforementioned savings account.
Whilst the concept of paying yourself first has the simple benefit of building up a savings reserve, it also has some other, less obvious, attributes.
Consider, for example, the boiler breaks, you experience a sudden loss of earnings, or the loyal car finally splutters its last.
For some, in times of sudden and unexpected expense, credit can seem like the only option.
At the time of writing, the news this morning estimated UK average unsecured household debt at circa £15,000. But those who have managed to build up a reserve may be able to avoid the credit route altogether.
This idea is just one of many financial planning principles that can make a real difference to one’s wealth, and ultimately let you live a life free of financial stress.