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Pay Yourself First!

 

Pay Yourself First

After reading the Canadian Payroll Association (CPA) survey on how dismal personal savings rates are, I thought I’d write a post on the “pay yourself first” principle.

First off, in case you missed it, the CPA report found that:

  1. More people are living paycheque to paycheque.
  2. 51% of people would be in trouble if their pay was delayed by 1 week!
  3. 26% of people said that they could not come up with $2,000 for an emergency!
  4. Over 50% of people said they save 5% or less of their paycheque!
  5. 79% of people said they will delay retirement beyond age 60!

Overall, I’d say the report paints a pretty grim and bleak picture, especially when you consider that many personal finance authors recommend saving at least 10% of your gross pay!  In fact, the Wealthy Barber goes even further and says to save that 10% in addition to maxing out your retirement savings account.  So now we’re talking more like 20%.

If you find yourself in the boat of living pay to pay and having no savings, you may want to think about the “pay yourself first” concept.  Nearly every book on personal finance begins with the principle of paying yourself first.  Here’s what Rich Dad had to say about it: “the poor pay themselves last, and that is why they’re poor…but the rich pay themselves first, and that is why they’re rich.”

What does paying yourself first mean anyways?  After all, many people find it difficult to pay themselves first because they feel that they have too many other payment obligations: credit cards, gas cards, phone, cable and internet bills, hydro and gas bills, student loan, car loan etc. etc.  Add in the monthly rent or mortgage and groceries and the monthly budget is pretty well spent.  With little to nothing left over, it is easy to see why so many people struggle to save.

Most people treat personal and retirement savings as an afterthought…as something to be contemplated once all the monthly bills are paid and they’ve satisfied their appetite for consumption.  In this manner of thinking, one’s personal savings amounts to mere scraps or leftovers, if there is any in fact leftover.  Savings are treated as a luxury and not a necessity.  Savings are considered a “want” and not a “need”…as something that can be deferred to some future time and therein lies the problem.

The “pay yourself first” concept is about changing this “lazy” pattern of thinking.  By treating personal savings as a necessity, as something that’s just as important as your monthly rent, mortgage or car payment, makes it more likely that you’ll actually find a way to make it happen.  It may mean cutting spending in other areas or even may require finding a second job, but the point is that you’ll find a way.

By asking “how” it can be done forces us to think of creative ways to achieve our goals, rather than simply saying that it can’t be done and shutting our brains off.  We all have choices to make with regards to how we manage our money.  We may not always like our choices, but they are ours to make nonetheless.  Some of these choices may be things like buying a used vehicle over a new one, living in smaller place, wearing less expensive clothing, bring a lunch to work etc.

The key to paying yourself first in my opinion is really setting aside an amount, however small, to be automatically withdrawn from your bank account on a regular basis [before you can spend it!].  I set my automatic withdrawals to coincide with my paydays so having the money in the account is never an issue.

From time to time on this blog you’ll see me write about the power of small amounts.  Because we don’t start off as millionaires investing our money, starting with small amounts is essential.  I’m a huge fan of the power of small amounts for 3 reasons:

  1. You build a habit of regularly saving and investing.
  2. Small amounts are easy to deal with – $25/month will hardly put a dent in someone’s budget.
  3. Small amounts build up to huge sums over time with the help of compounding.

When I first started my automatic savings plan, I started with $25 per pay.  My pay is bi-weekly so after 1 year I would have saved $650.  After my second month of saving, I realized that I didn’t even notice the $25 gone, so I increased the amount to $50 and so on until I reached the maximum that I could comfortably afford.  Now I only ever increase the amount once I get a pay raise.  The point of my example is that you don’t need to immediately start saving a huge amount.  I started small and steadily increased the amount until I reached a level that I was comfortable with.  For each person that level will be different.  Remember that saving doesn’t have to be an enormous burden and if you set up an automatic savings plan you can finally start paying yourself first!

If you’re interested in learning more check out my article on How To Find Extra Money to Save and Invest.