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We tend to always tell ourselves that we will perhaps start saving or investing next month, or after we pay down our bills and expenses.
By the time you’ve done paying your expenses or credit card bills, guess what – you’d have nothing left to save or invest until your next salary credit. The cycle repeats itself every month.
You’d wished you had started earlier
I’ve had colleagues and friends who tell me that they wished that they had started saving or investing earlier. Perhaps it was not a conscious lifestyle choice, or that they had no clue what to do with their money when their salary comes in.
The reason why you should start paying yourself earlier is that you allow sufficient time for your money to compound. Now compound interest (i.e. interest on interest) is a very powerful tool to grow your money exponentially. You are literally earning money on your money earned from your money.
When you start early, regardless of the amount, you are giving yourself the benefit of time abundance and self-discipline to create a wealth accumulation habit. Imagine trying to do this when you’re 35 with a family – you definitely need to work a lot harder to change your spending habits while being tied to family commitments!
Self-discipline is key
Paying yourself first is all about self-discpline, to invest in yourself before spending the money away on other necessities. It is hard because we tend to pay off our expenses first, and are taught to save the leftovers.
A typical working adult pays off their bills, loans, instalments first, then uses the balance on paying for their daily expenses, before savings the remaining – which probably isn’t much left. I am guessing that’s 5-10% of their salary remaining.
For me, I flip this entire concept around by saving or investing first – before paying off my bills and other expenses. I try to pay others less, so that I can pay myself more.
Focus on building your assets first
If you read the book Rich Dad Poor Dad, you’d be taught to build an income-producing asset base first, which can be used to generate income to sustain your living expenses.
Take this illustration –
Salary $4000 > Pays off housing, phone, education bills > Pays for family expenses > Saves $500 every month for 10 years (3% interest from SSB)
Salary $4000 > Invests $800 every month for 10 years (3% interest from SSB) > Pays any outstanding interest-bearing loans first > Pays off bills and reduces family expenses
Assuming the investor buys a 3% yielding SSB at the end of every year, at the end of 10 years, the typical worker has $68,783 while the extraordinary worker has $110,053, despite investing in the same risk-free investment product. A modest $300 increase in savings per month can lead to a HUGE difference in final sum – and that’s without taking into any account salary increments.
Executing a flawless plan
You must be thinking, how do I pay myself first? It sounds simple in theory, but how do I execute it flawlessly?
For me, I create 4 bank accounts for 4 different purposes: salary credit, savings, investing, and spending. I know it’s going to sound crazy – why do you need 4 bank accounts?!
Each account has a specific purpose. The complete segregation of accounts means that I know what every account does, how much I have in budget for a specific purpose, and it prevents me from being itchy about my money. Now – you can create as many or as little accounts as you’d like to suit your purpose, and you are free to use your money for any reason as you’d like. But building a disciplined and conscious rigour to your money habits would take you far in life.
Automation makes this easy
Truthfully, it’s not difficult to manage 4 bank accounts. It may very well be all from the same bank! Anyway, the key to making this seamless is the use of standing instructions or scheduled transfers.
Assuming you know when your salary gets credited into your account every month. Let’s say it’s on the 12th of the month and it gets credited regardless of the day of the week. The simplest setup would be to create automatic standing instructions on the 13th of each month to automatically channel money from your salary credit account to your other accounts in the amounts you’d like.
But assuming your salary gets credited within a range of dates, or only on a weekday, then you’d need to pre-fund your salary account with preferably one month’s salary as a buffer so that your instructions don’t bounce or result in a bank overdraft.
Paying yourself first should be simple, easy and consistent
The worst thing to be doing is to create a complex transfer schedule or plan to pay yourself first.
You don’t need to worry about how much to transfer to each of your accounts. They can be refined over time as you expect salary raises, changes to expenditure needs and other life changes. The most important takeaway is to be consistent and keep the entire process simple by automating it.
Set it once, and forget it. Everything happens behind the scenes right after your salary gets credited. Eventually, if you do want to expand on uses of each account, e.g. automatic investment in Singapore equities, you can set them up in the future.