Pay Yourself First: The Secret To Saving?

The pay yourself first rule is often flaunted as the holy grail of saving money.

Alongside “spend less than you earn” and “live within your means”, it’s a pillar of personal finance.

But does it actually work? And how do you put it into practice?

Let’s dig deeper into “the golden rule” to find out…

What does Pay Yourself First Mean?

Pay yourself first is simply a way of managing your money that prioritises saving.

As soon as your wage drops into your account, you deduct your savings – or pay yourself first – before paying your living expenses or spending on discretionary purchases.

It’s the reverse of what most people do, which is to spend what they like and then try to save what’s leftover.

Does Pay Yourself First Work?

Without a doubt; YES!

Paying yourself first puts your financial priorities first.

It doesn’t matter if your goal is building an emergency fund, saving for your first home, or funding your retirement.

By paying yourself first, you’ll make progress towards your goal each payday.

Pay yourself first is the smart way to save because:

1. It Resists Temptation

Corporations spend millions on marketing each year to get you to part with your hard-earned cash.

They create a false need to keep you in an endless cycle of accumulating, replacing and upgrading.

Their marketing could sway you if you have cash in your account.

But stashing away your savings as soon as you get paid lessens the temptation to blow your wages on stuff you don’t really need.

2. You Consistently Save

I could never save money in the past. I blamed my low salary and the cost of living that felt unfair.

But truth be told, I never saved because saving was low down on priorities.

This is what my old spending pattern looked like:

BILLS > LEISURE > SAVINGS

Saving was always an afterthought – and it never happened.

But after I wised up to personal finance and implemented the pay yourself first principle, I magically found that I could save.

Here’s what my spending pattern now looks like:

SAVINGS > BILLS > LEISURE

Saving is the first “bill” I pay every month.

If you adopt the same mindset of savings being the first bill you pay every month, you’ll find that you always manage to save.

What Is The Best Way To Pay Yourself First?

I first heard about the pay yourself first principle in Rich Dad Poor Dad.

In the book, Robert Kiyosaki explains two different methods of paying your bills.

The first is the usual way: you use your wage to pay your bills first, and any spare cash is yours to spend or save.

The second method utilises the pay yourself first rule: before you pay anyone else, siphon off your savings and invest in assets that generate income.

This creates more income, which is used to pay bills or for further investment. Eventually, your income from assets will cover all your expenses.

This is golden advice. It’s the blueprint for achieving financial freedom.

But a word of caution…

If you were to follow the advice in the book to the letter, you’d pay yourself a set amount first, and then work out how you’d cover your mortgage and other bills.

The idea is that the pressure of having to make ends meet will force you to think of ways to come up with the money.

According to Robert’s words: “Paying yourself first is not easy. In fact, it can be scary, especially when the bills are piling up.”

In my opinion, this is terrible advice.

Investing before you pay the bank won’t make you wealthy, it’ll make you stressed and worried.

So, if you’d rather skip the heart palpitations and sleepless nights, I’d suggest a watered-down version of the pay yourself first rule.

I’d suggest setting up a standing order to deduct your savings the day after payday.

And when creating your budget for the following month, including your savings standing order as a bill that MUST be paid.

Make sure that you have enough income coming in to cover all your bills.

And voila! you’ve got an automatic system for saving money every month.

I call it the Pay Yourself Automatically Rule. It doesn’t have the same ring to it, but it works, and it’s stress-free.

What Percentage Do You Pay Yourself First?

How much you save will be determined by your goals and how badly you want to achieve them.

The more you prioritise your financial future, the more your current lifestyle will be affected.

Personally, I save the first 20% of every wage.

My savings rate has been higher in the past – it was 50% when I was pursuing FIRE – but I’m happy with saving less to have a better lifestyle.

So, there isn’t a one size fits all for saving, unless we’re talking about retirement. If you’re saving for your golden years, the amount you should be socking away will depend on your current age, the age you want to retire, and the likely return of your investments.

But if you’re starting early (age 25-30) and want a comfortable retirement, the general rule of thumb is to save 15% of your pre-tax salary into a pension.

Saving 15% of your salary might seem an impossible target right now, but your savings rate grows as you advance through your career and earn more – provided you don’t inflate your lifestyle.

Start with saving what you can in the beginning, and then look at ways to save more.

The crucial thing is that you adopt the habit of paying yourself first.

Wrapping It Up

Many people feel they don’t make enough to save. But the mistake they make is trying to save what’s left over.

If you treat savings like any other bill that’s gotta be paid, you’ll never “forget” to save.

Setting up a standing order to pay this essential bill is the easiest way of implementing the pay yourself first rule.

It removes the discipline required to save, and it will build great wealth over time.

And after a few months, paying your savings bill will become the norm, and you won’t even notice it.