I talk a lot about saving money here at The Frugal Cottage; if you’ve read any of my earlier posts on our aim of retiring early, paying off our mortgage early or just my monthly aims where I set myself a target every month, then you know I like to save money. Saving money should be a habit that everyone should get into, whether you can put aside £5 or £500, getting into the habit of regularly saving money is only going to be a good thing for your finances. There are many ways of doing this, such as my account tidy method, but I’m going to talk about a different method today.
One of the most important ways of saving money and getting into the habit of saving money regularly, so pay yourself first. It can be so simple, especially if you automate this process!
Basically, the method of paying yourself first is all about giving yourself some money from your monthly pay. On the day you get paid – whether that’s weekly or monthly – you can automate it so that a certain percentage of your income is automatically moved to an investment or savings account. That means that you have effectively paid yourself first, from your own salary! And because it is done automatically (or manually, if you are disciplined enough!) then you cannot touch that money and your savings should grow.
The reason why it’s pay yourself first is that it is the first thing you do when you receive your income. You might have really good plans to save what is left at the end of the month, but real life can often get in the way! Before you know it, all of the money in your account is low and suddenly the savings aim you set yourself at the start of the month is unreachable. But, if you transfer it the day you are paid, then you’ve done the hard work straight away 🙂 this can also help you with your budget, as you only have the leftovers – so to speak – to spend and once that is gone, then you have nothing left to spend. It can be a bit tricky to balance to begin with, but it just takes a bit of practise.
The pay yourself first rule is how I do our savings. At the moment, I aim to save £600 a month which goes into my investment account to create more dividend income. When we were having the building work done earlier this year, I had to reduce the amount I transferred over on payday. Now I mentioned about automating this earlier but I actually like the aspect of logging on to my online banking and manually transferring the amount across. In fact, the payday shuffle is my favourite thing to do! That’s when I do our mortgage overpayment too, in the same way.
Creating a system which ensures stability and progress, every single month, can accelerate the path to financial freedom. But, a lot of people worry that they won’t have enough income to survive the month once they’ve transferred their savings. Especially to begin with when it’s a new system to get used to. But, the only way to learn this is to implement the system and learn as you go along. You will soon see patterns in your spending habits and ones which you could cut out or lower. This system will also put into your question your own priorities in terms of saving for early retirement/financial freedom/debt repayment/any other saving goal you may have, because it will look at what you consider to be more important.
If you think that this may be hard, start off with 5% of your income transferred on payday. If this is easy by the end of the month, then increase the percentage over time. That way, your savings/investments grow and you get into better budgeting habits. It’s a win-win situation! It might also reduce buying more stuff, which is also a good cycle to break.
Do you use the pay yourself rule? If not, why not? Let me know!
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Making the first step is difficult but once you get used to this, it’s easy – it becomes part of your monthly bills. 😁
Absolutely 🙂
Great post. 🙂
“Pay Yourself First” is the number one rule I teach my children.
All 3 of my kids have a money box or jar that (the majority of the time) they save 10-20% of their pocket money and gift money from birthdays and Christmas.
If they hopefully, continue this habit through just say the first 10 years of their working lives they will hopefully set themselves up for a comfortable financial life and retirement.
Also, if they combine “Pay Yourself First” with avoiding debt, then all other money issues will pale insignificance in the scale of things.
For example, if they ever get sucked into overspending on fashion or wasting money on a new car, it won’t be such a big mistake because they will have already prioritised themselves financially.
Great tip! I “pay myself” by transferring my monthly spend allowance to a separate account. That way I make sure the rest of my pay only goes to bills and savings.