All fundamental wealth begins with paying yourself first. Unless you are going to inherit the money or win the lottery or get lucky somehow, all fundamental wealth and financial security begins when you decide to pay yourself first. You need to decide that when you go to wrk, the first person that is going to be paid is you. Not the government, not the credit companies but you. Once you make this decision, that is when it all changes.
Pay yourself first is the idea that that you should routinely and automatically put money into a savings account before anybody else gets their hands on it. This means that you should put money into your savings account before you pay your bills, buy your groceries or purchase anything else. The first bill you essentially pay each month is essentially to yourself.
Why you should pay yourself first?
Many people approach saving by putting an amount into their savings account after paying all their bills, groceries, clothes shopping, nights out and every other expense. The problem with this approach is they save what’s left over. Many times, you find that you hardly have any money left over at the end of the month and your savings account remains in the low triple digit figure.
But if you pay yourself first by treating your savings account as a bill that has to be paid at the beginning of the month, you will automatically have to put money into your savings account. By putting money in your savings account, you will have less money to spend on the junk you normally spend it on month in month out. By using this approach, you will see your savings account swell and save money you would otherwise have spent on non essential items or on invincible consumption.
By paying yourself first, you are mentally establishing saving as a priority. You are showing that you have a high self worth as you pay yourself first rather than the electric company or credit card company. You spend a good amount of time at work everyday and you need something to show for it rather than money just disappearing off to utility companies and the like. You deserve to be paid first.
How can I pay myself first?
The best way to pay yourself first is to put money into your companies work place pension. This way you are guaranteed to pay your self first as you put money into the retirement account before the government is able to take off income tax and national insurance contributions.
An alternative to a Workplace pension is to open a Self Invested Personal Pension (SIPP). With the SIPP, the SIPP provider claims the basic rate of tax back for you on your behalf. So if you are a basic rate payer and you pay in £100, the SIPP provider will add £20 on your behalf which is the income tax the government deducted from your pay. If you are a higher rate or additional rate taxpayer, you can claim the additional tax back on your SA return. For more information on this, read the article on how pension contributions work and how you can claim relief on your pension contributions.
Is you have a workplace pension, a SIPP or just a normal big street bank current account, the best way to develop a good savings habit is to make the process as painless as possible – make it automatic. If you arrange to have the money taken from your pay-check before you receive it, you’ll never know it’s missing. By setting up an automatic plan or standing order to send your money straight to your chosen account, you ensure that the person who is most important in your life is paid first; you.
Paying yourself first is such a powerful concept in finance that the government and large corporations use it. Think about this, when you receive your payslip from work, tax is already automatically deducted from your gross income – this is the way government pays it self first. It deducts money before you even have the chance to get your hands on it and spend it all. If the government is using pay yourself first, why aren’t you ?!