When I decided to follow the principle of paying yourself first I managed to exponentially increase my savings rate from around 10% of my income to 30% of my income. I discovered this principle from a book titled the Richest Man in Babylon. The book is made up of short stories or parables which the author uses to teach the reader a set of finance lessons.
Prior to following the principle of paying yourself first, I would receive my salary for the month and immediately pay bills- rent, mobile, broadband and groceries. Then I would pay Sony and Netflix for entertainment. Through the course of a month I dwindled down my cash through frequent spontaneous spending on lunch or takeaways. And whatever amount of money was left over is what I would save.
Trying to save this way meant my savings rate was not consistent. Over a six month period my savings would read something like this: January savings +£100.00, February savings +£50.00, March savings +£73.00, April overspend -£200.00, May savings +£65.00, June savings +£35.00, so in my mind I thought I’d saved quite lot, but what I didn’t include or didn’t realise was the one month where I spent close to what I managed to save over five months. As a result, I was moving sideways instead of moving closer towards a total savings goal. However when following the principle of paying yourself first, I found you are always making progress, every time you execute the principle, you will always be further head compared to the previous month. The way I interpret this principle is, the money you get paid at the end of each month only came into existence through you exchanging your time and skill set at a job or business. Therefore, paying yourself first is simply acknowledging this.
In order to execute the principle of paying yourself first, I needed to change other aspects of my savings behavior. The first thing to have in place was a savings target. In my case, my target was £6000.00. Additionally I gave a personal reason as to why I wanted to save £6000.00. And the reason was because I wanted to have a contingency fund in place before investing in property and the stock market. Something else I did, which is not mandatory, I decided to challenge myself by saving 30% of my income instead of the 10% suggested in the Richest Man in Babylon.
I then took action, I opened separate accounts for my income and my savings. I did not allow my income and savings to remain in the same account. To make this easier, I made use of standing orders. On the same date I received my income, 30% of my income would automatically be transferred from my ‘income’ account into my separate contingency account.