Why you must pay yourself first

What is the first thing you do when you see your salary credit in the bank account? Do you let it all go into EMIs, bill payments, materialistic acquisitions and leisure activities? Or do you give it some more thought to ensure you pay yourself first.

What does pay yourself first mean?

Two people who most popularized the idea of “paying yourself first” were Robert Kiyosaki in “Rich Dad Poor Dad” and Napolean Hill in the legendary book “Think and Grow Rich”.

The idea is that with EMIs or bill payments, you are using your money to first pay other entities. You owe it to yourself to prioritize to start paying yourself first. Essentially, you need to prioritize saving as your first go-to with the money and earmark it for yourself rather than spending it all on past purchases or billers or even any retail outlets.

Why must you pay yourself first?

You might be wondering how does paying yourself first even help and why does it matter. Read on for some of the benefits of making it a habit: 

• Prioritizes your future self

This habit helps you to prioritize your future self rather than giving in to the delights of today. Research has shown that we humans have a habit of looking at our future outlook with rose-coloured glasses, underestimating things that could go wrong. When you pay yourself first, the probability of being prepared for anything in the future is far higher.

• Avoid the trap of instant gratification

Most humans tend to give in to instant gratification, rather than wait longer for better rewards. When you start paying yourself first, you are helping yourself avoid the temptation of spending it all and growing your ability of falling for instant gratification. The great bit is that the higher your tendency to wait for delayed gratification, higher the probability of success in varied areas. 

• Makes saving a disciplined habit

While market performance, asset allocation and rebalancing will influence to a degree the kind of corpus you are able to build over the years, the amount of principle you are able to invest will be the biggest factor that will fuel achievement of your financial goals. When you make paying yourself first a habit, savings and investing becomes a disciplined practice making it much easier to achieve your financial goals.

How to make paying yourself first easier?

A lot of things sound good in theory but are far more difficult to implement in real life. However, there are a few tweaks you can make that will make pay yourself first easier on you as well as a far pleasant activity.

• Make it automatic

Use a beneficial method like SIP or Systematic Investment Plan that automates the Pay Yourself First route for you. When you know that the amount is going to be debited from your account, you end up instinctively not spending it and ensuring it is invested, month after month. 

• Link it to a goal

When we start doing something, the probability of doing it for longer is far higher when there is a reason to it. Link your savings and investment to a goal. The more you see your progress on that path, the higher will be your discipline on it.

• Watch it grow

When you start paying yourself first every month and investing it in growth instruments like Equity Mutual Funds, as you see your funds accumulate and grow over time, you will begin to realize the benefits of it. Over time, what might have required a lot of effort on your part will become a far easier, more instinctive process.

Personal finance is easy if we stick to a few basics and put in place processes to have it require fewer interventions. Pay yourself first is one such basic practice which will stand you in good stead. 

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Pratik is an MBA from IBS business school – Mumbai, with dual specialization in Marketing and Finance. He is driven by passion for markets and loves to analyze client portfolios with a long-term approach. He believes in the principle of asset allocation and diversification to maximise client return following a risk-based approach. Managing risk comes naturally to him, owing to his prior work experience with worked for ICICI Prudential Life Insurance Co. Ltd.

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