Pay yourself first

That was the first concept I learnt when i started reading about personal finances.

What does it mean? It means that before paying for food, your rent or anything else, you save some money first. You pay your future self first.

The concept is simple: when you receive your income, you put a percentage directly into a saving account. The goal being to function on the remaining income and save automatically every month. While the concept is simple, in practice, it requires you to have a budget, to know how much you can set aside, realistically (I insist on realistically!) every month. Indeed, when you start budgeting, you may be tempted to save more than you can, for example by deciding that you won’t eat out this month. While this can temporarily help if you have debts, it is not really sustainable when your income already covers your expenses. This article will help you build a budget.

Back to the concept, let’s get an example. Julie earns 2500€ per month, every month after paying all her expenses, she has between 100 and 500 left on her bank account. She found out about the "pay yourself first concept" and is excited about it. She decides to put 500€ of her next salary in her savings account. Few days, later she realises that during that month she will need to buy flights tickets to go back home so she is obliged to take some of the money out of the saving account. While she has the best intention, saving more really forces you to have a budget that is airtight, without any surprise. However, when you just start building your budget, it’s simply not possible.

She starts again the next month, putting 100€ aside and this works better because she does not need to take money back. This is fictitious of course but you could even start with 10€ if you are a student for example and have a tighter budget. The goal of this exercise is mainly the discipline you gain. Indeed, if as a student you were able to put these 10€ aside, the more you earn money the more you are capable of adding to your savings. If you start later, it’s also ok, 100€ saved per month is 1200€ per year that can be used for a project you wouldn’t have had the money for otherwise (because let’s be honest with ourselves, if after few months, Julie has 800€ extra on her common account, the chances to blow it on random shopping are pretty high).

What comes first? The paying yourself concept or building a budget?

I started with paying myself first simply because it can be actioned right away. You can open saving accounts from the comfort of your couch (with ABN Amro, you can open up to 10 saving accounts for free) and you can put a standing order on your banking application for the day after you are paid. I advise to set it for the minimum you see you have left per month.

Building a budget can take up to a year (the time to cover all the expenses), so if you start with that, you loose one year of savings. Once you have a budget that works for you, you can increase the amount you save automatically every month.  

I have used only the term “saving” in this article but if you are already investing, the investment money would also come from the same saving pool. On 500€ saved, you can allocate 350€ to savings and 150 to investing.

In practice:

• Check how much you had left on your bank account just before you received your next salary for the last 6 months. No need of any calculation: open your bank account and look for the last transaction before your salary, open it and it shows the balance after the transaction, write it down. Do the same for the other months.

• Take the smallest of those amounts. If you had 80 left in August, 70 left in September, 100 left in October, 50 left in November, 25 left in December and 30 left in January, the smallest amount is 25.

• create a saving account

• create a standing order that will send 25€ to your saving account a day or 2 after your receive your salary.

Yes the amount will seem tiny at the beginning and you may feel that it is not going fast enough but remember you were not saving before so the smallest step is already great!