Why it is best to ‘pay yourself first’?

Paying yourself first is a budgeting technique that ensures you allocate a fixed amount to savings each payday, before you spend your money on anything else. Establishing this habit will help you be disciplined and achieve your financial goals.

Start by working out what you spend on essential expenses, such as accommodation, transport, electricity and groceries. Then set a realistic amount within what is left of your income that you can save every month.

If you leave saving until the end of the month, you will be tempted to spend on non-essentials, such as clothing, entertainment, eating out or getaways. You will then convince yourself that you have no money left to save.

If you pay yourself first, your savings amount is transferred from your account as soon as you are paid. Soon, your contribution will feel like your other deductions or debit orders, and you will learn to live without this money.

Separate account

The key to paying yourself first is to set up a separate savings account or an investment, such as a unit trust or exchange traded fund (ETF), and automate a transfer or payment to that account on the day you are paid.

For emergency savings or short-term goals such as a holiday or renovations, choose a savings account with a fixed term aligned to your saving horizon.

For medium to long-term savings, consider a unit trust or ETF with potentially higher returns and that are slightly more difficult to access through a withdrawal.

Giving your savings goal a name, targeting an amount, and working out how long you need to reach it will discourage you from raiding your savings.  Use tools like the Smart About Money Savings Goal Calculator to determine how much you need to save each month.

Even if your initial savings are small, being aware of your goal can prevent impulse spending and motivate you to add to your savings when your earnings improve or your expenses reduce.

Pay yourself first for these goals

You may want to start small with just one goal, but over time you could set up a number of savings and investment accounts tailored to different goal’s timelines.

An emergency fund

Start with this if you do not have an emergency fund. An emergency fund will help you to stick to your budget and keep your savings intact when financial emergencies, such as injury or illness, home or car repairs, arise. Read more: How do I set up an emergency fund?

 
A short-term goal

A short-term savings goal takes between a year and three years to reach and provides for expenses such as an appliance, a mini-holiday, or December expenses.

A medium-term goal

Save for bigger things such as an overseas holiday, a wedding, a deposit on a house or a car over three to ten years. Watch: Setting savings and investment goals

A long-term goal

Save for more than 10 years for bigger goals, such as for your retirement or your children’s tertiary education. Read more: How much do I need to save for retirement? and use Smart About Money’s Retirement Savings calculator

Consider setting up a retirement annuity if you do not belong to an employer-sponsored retirement fund, or you need to supplement your savings.

 
If you are in debt

If you have costly short-term debt such as a personal loan, credit card debt or overdraft, pay yourself first by paying down your debt and reducing the interest that is compounding against you

Pay more than the minimum repayment and use the avalanche or snowball method to pay your debt off faster. Avoid taking on new debt by balancing your debt repayments with some provision for financial emergencies. Let your circumstances, and the kind of emergencies you are likely to face, guide you. When your debt is repaid, use what you were spending on repayments to save.

Start small

Start small if you need to, and build your savings habit. Even modest savings compound over time, and the more you can save and avoid debt, the more it will enhance your financial position and enable you to save more over time.

Consider boosting your income with a side-hustle or working overtime, or by cutting your non-essential spending to boost your savings.