Pay Yourself First

Why should you pay yourself first and what does this mean? The road to financial independence requires capital – cool hard cash. Money to give you options and to buy investments. You will only do this when you pay yourself first.

By now you should know what situation your money is in(Step 1) and you will have built a foundation of wealth protection (Step 2), if not please go back and action these steps before going any further.
So what do I mean when I say pay yourself first? Most people, when they start out trying to save up, will cut back on expenses; If there is any left over at the end of the month this goes into the savings account. This is not going to work for two reasons:

It requires massive self-discipline – most of us don’t have this.
If there is any money left over, it will not be a consistent amount.

So to pay yourself first you would take a regular amount of money out of your current account, THE DAY YOU GET PAID, and put it in a different account. You will only touch this money to buy investments. (By the way, this should be in addition to the Company or Personal Pension you set up in the previous step). The first time I heard about this method, I could immediately understand the logic but I thought about the pain of the sacrifice. What I didn’t know and I do now, is that once you start paying yourself first you won’t actually miss the money. I guarantee it. I started to do this in my late twenties and I can honestly say that it was the best thing I ever did, from a financial perspective.

How to Pay Yourself First

Here are the essential five steps to pay yourself first. Follow these and you will soon see your capital growing.

If you don’t already have one, open a separate savings account.
On pay day transfer a set amount of money into this account I would say you need to aim for a minimum of 10% of Your Net Income.
Do Not Touch This Account, except for buying investments. If you feel you might be tempted to dip into this, choose a notice account, where you have to give 60 days notice to withdraw the cash.
Repeat each month – forever!
Even better would be to make this an automatic transfer or standing order, so you can forget all about it.

I guarantee that if you do this on three consecutive months, you will do it forever. The habit will be ingrained.

Should you pay off your debts before saving up? Logic would say that the interest on debt is more than the interest you will receive from savings, so pay debts off first. I would say do both at the same time. Paying off debts and creating Capital give you a double psychological boost. So the next chapter we will be about paying off your debts.