Do you pay yourself first?

The history of the concept “Pay Yourself First” dates back to almost 100 years back when it was penned down by George Clason in his book called “The Richest Man in Babylon”. It was later reiterated by Robert Kiyosaki in his book, “Rich Dad Poor Dad”. The simple phrase “Pay Yourself First” has made it’s way big in the world of finance, this philosophy is accepted universally and is recognized as the golden rule of personal finance.

“I’ll put some money away if there’s any left over.”

This is most people’s attempt at saving money for their future. Only problem is…there’s rarely any money left over.

Paying Yourself First means that every time a rupee flows through your hands from an outside source, you take a little piece of it (usually 20-50%) and put it away and by putting it away we mean Save it and invest it in appreciable assets…

For a better understanding of the concept, let’s answer a simple question first. How do you go about managing your expenses and incomes? Most people, after receiving their salary credit, would pay for the necessary expenses, like rent, groceries, kids’ school fee, EMI’s, insurance, bills, etc., then they would pay for discretionary expenses. And after paying off all the expenses, if there is a leftover, it is their saving which they would invest for their future. This implies that the money you earn is paid to others first and lastly the remains, if any, are paid to you. And this is precisely the reason why many people work hard and also earn well throughout their lives, but end up empty handed in their old age. The “Pay Yourself First” concept states that you have do just the opposite. Pay yourself first, invest for your future, and manage your expenses from the residual. George Clason, in his book noted,“I found the road to wealth, when I decided that a part of all I earned was mine to keep”. The first one to savor your income should be you. 

Warren Buffet once said, “If you don’t find a way to make money while you sleep, you will work until you die.” The ‘Pay Yourself First’ philosophy also propounds to invest a portion of your income in creating cash flow assets, i.e. which are capable of generating a passive income for you. And further you invest the passive income you receive from your investment, in more cash flow assets. It works like a chain, money will make more money for you.

Coming to the application part, the philosophy is very simple, but the practical application of the concept in our daily lives is the critical part. This is because we fear we may run out of money for meeting our other necessary expenses like paying our bills, EMI’s, fee, etc., if we first take out a chunk of our money for ourselves and invest it. The solution is ‘Discipline’. It’s like going to or not going to the gym. On one side, the justification you would give to the world and to yourself, you don’t go to the gym because you don’t have time; or you hit the gym every morning at 6 AM despite you dropping your kids to school every morning, your 10 – 7 of office hours + two hours of commuting, time that you spend with family, and a number of other chores that you have to do. The first option is convenient but it is not the right thing to do for your body, the latter requires commitment and discipline, exactly what we need in paying ourselves first.

So, how do you go about following the principle?

• The first thing to do would be defining the portion of your income that you’ll pay to yourself, this number will depend largely upon your non-discretionary expenses, your insurance premiums, rent, EMI’s, groceries, basically the money you need to survive.
• Secondly, once you figure out the above amount, you have to have a disciplined approach, meaning no cheat meals, no skipping of the savings for yourself as well as no dipping into your corpus.
• And lastly, periodic review of the Pay Yourself Amount and bringing it at par with your earnings, your debts outstanding, and your saving capability.

The theory also suggests that one should take minimal loans, EMI’s generally constitute a major part of an individual’s total expenses. The idea is to first invest for your future before taking a loan for a big car. If you are buried under debt, try to get out of it first, because the loans will never let you pay to yourself generously.

To conclude, Pay Yourself First simply means to secure your own future from your income before anything else. It is a very simple and a powerful principle for creating wealth. The principle, if practiced religiously, can take you closer to your long term goals in a short span of time, and all it takes is “SELF-DISCIPLINE”