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Paying yourself first essentially means saving before you do anything else. So rather than going on a spending spree, paying your bills and expenses first and then saving what’s left over, you do the opposite. Setting aside money for an emergency fund, retirement or a down payment requires time, patience and hard work. Below are 5 steps to paying yourself first.
- Determine your current level of income
Most people would look at their income from their full time jobs but if you are self employed or have additional income from side hustles, include that too. If this fluctuates month to month then use your average income over the past year and then divide by 12 to determine your monthly income.
- Clear any outstanding short term debts
Make a plan to clear any short term loans and credit cards as soon as possible. After all, there is no point in putting away money for a savings account when you are going to pay 20% pa on an existing credit card debt.
- Budget for and minimise any expenses
The easiest way to do this is to look at your bank statement. Are you paying too much for your phone or electricity for example and have you looked at how much you can save by switching providers? If you think tracking your expenses this way is to challenging, I would recommend software like Mint, which simply tracks your spending for your by category and thus, giving you a clearer picture of your expenses.
- Subtract your expenses from your current income
If your monthly income is $2000 and your expenses are $1500, then this technically leaves you $500 to pay yourself first with. However, you can increase this if you take active steps to reduce your expenses as in step 3. If this figure is negative however, then reducing expenses will become even more important.
- Set aside a portion of what’s left into a savings account.
As a general rule, I would say you should pay yourself first around 10% of your net or take home income. The more you can pay off your leftover income from step 4, the better, but of course you may wish to pay yourself a bit less to treat yourself once in a while! Don’t forget to set yourself a specific savings goal i.e. a $20000 down payment and work towards that.
What steps have you taken so far towards paying yourself first?