A phrase I keep seeing around the personal finance blogsphere is the “pay yourself rule”, especially when relating to financial freedom and early retirement. Both of which is what we are aiming for, so it’s important to know what this rule actually is!
The pay yourself rule is nothing to do with earning money, but in fact a way of saving it. The rule of thumb is to automate a payment to your savings account or investing account the day you get your salary. That way, you cannot spend your money and you get to meet your savings and investing aims. If you do this, then you ensure you meet your saving/investing aims before you do anything else in the month, which is a vital key to having enough to retire early on. It also becomes a habit, whether you automate the payment or do it manually every month, which in turn will make meeting your goals even easier.
If you leave your saving and investments until the end of the month, chances are you probably find yourself without the amount you would like to transfer to savings. Those little discretionary spends throughout the month add up and, before you know it, you are left with very little at the end of the month. If you save your target amount at the beginning of the month, then you are to live on what is left. It can also help with budgeting, as once the money is gone, then it’s gone. It can be quite a hard lesson to learn!
This is the system we use for our savings, which works for us 90% of the time. The only time when this has not worked in recent months is when we bought a new-to-us car, which then needed insuring and taxing. Every other time, this is how we do our savings. When I get paid at the end of the month, I automatically transfer money to savings, hopefully close to what I aim to achieve in my monthly aims. We then live on what is left, plus my husband’s salary for the duration of the next month. There have only been a couple of occasions where I have transferred over a set amount and by the end of the month we’ve had barely anything left in the pot. But, then it’s a good learning curve for how our expenses can rise if we’re not paying attention.
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. 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 are probably unnecessary to your budget. 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!
Do you use the pay yourself rule? If not, why not?
Nice post. It is a really important rule which makes a huge difference. At the moment I am “paying myself” about 150% what I spend each month but it is a little variable at the moment (more rather than ever less than I would expect).
However, at the moment I have metronomically consistent expenses and earnings. This, I fear, will not last. As a result, the pay yourself rule becomes even more important. Making it a regular contribution means you can adapt to the new financial situation. If you already know you have £100 or £200 a week leaving your account you don’t spend it!
I used to transfer my regular savings into a standard savings account and then–when I next got paid–shifted most, if not all, over to my ISA. Currently, I am not doing that (it just goes into my ISA) but I will be changing this shortly.
Thanks for the nice write-up! Really interesting.
Regular contributions really is key to survival and change! 150% of your spends into savings is fantastic; well done you 🙂
An excellent rule to live by. My wife and I currently do the same thing. Every week, $500 is transferred out of our savings and into an investment account. We lucked out that we get paid on opposite weeks so as soon as the money comes in, it goes out.
It’s amazing how little money you “need” to survive when you are pretending you do not have that much. Earlier this year I paid off the rest of my student loans ($8K) and our savings was down to $3000. With the mortgage and CC bill coming due we were sweating bullets that our account got too low to pay everything off. However, we never stopped paying ourselves first and we tightened up spending A LOT for 2 months and are now comfortably back to the level we want to be.
Never stop saving!
$500 a week is awesome! And yes, if you can pretend you have no money, then you having nothing to spend, which means more saving 🙂 win-win situation.
Although I’ve never liked the phrase “pay yourself first,” we’ve been doing this for years and years and it’s probably the best strategy I’ve found for saving money immediately. By the time I started auto-investing, I had tracked our expenses down to a T, so it was simply a matter of deciding where to save the rest of it and automating it. For a time, we had transfers leaving our checking account every day of the week ($100 on Mondays, $80 on Thursdays…) to different investments.
My other key to this is that once you get comfortable with your automated amounts, you push up them up another $100 or $200 a month more. That way you’re forcing continual improvement by living on less. I also always make sure that one of the automated amounts goes to our money market account to eventually pay for those big expenses like you said, property taxes or what have you.
Good suggestion about pushing up your savings amounts once you’ve got comfortable, so you force yourself to live on less 🙂 thanks for stopping by!
My retirement fund is the first thing that gets automatically paid each month. I decided a few years back that this fund needed to be an priority and I’m so glad that I did. Whenever I see my balance I am so proud of myself for making that decision.
An excellent decision, which will pay dividends in the future 🙂
I would, but neither of us had a decent salary when we can afford to live off just the one. Plus we don’t join up our wages after bills have gone out.
I generally have little to none left after bills, the same with the OH
It worked for us. we saved the whole of my salary in two years before early retirement but before that aimed at 10% into pensions and 10% stocks and shares isa and 20% for home improvements holidays and cars so that was dipped into. long term savings were not touched so we both retired at 58 which is 8 years early.