Pay yourself first. The road to greater financial freedom, or even financial independence, is through this habit. Because it puts you at the centre of your financial strategy.
Money isn’t an end in itself. And money doesn’t bring happiness… but it contributes greatly to it.
Feeling a minimum of security, safe from life’s mistakes, being able to offer the same security to your loved ones, providing for your needs, responding favourably to some of your desires and enjoying small pleasures … That’s what money allows.
So, yes, it’s certainly not enough to make you happy. But it seems necessary to me or, failing that, a first step.
Earning and owning a lot of money is not an end in itself. It is a means to a better life: more serene, more confident, more able to project oneself into the future.
You have to build up a capital, an estate. You will not be able to possess this capital overnight, except for inheritance and gambling winnings. And no one will bring it to you on a board.
You must therefore create this capital yourself, by putting yourself at the centre of your concerns and your financial strategy.
The very first step: pay yourself first, i.e. deduct from all your income a share allocated to the constitution of your capital.
Why pay yourself first?
Paying yourself first means giving yourself the opportunity to build up your capital, your assets.
Indeed, to build up capital, you must have money to invest. This is what we call your capacity to save.
Well, to pay yourself first is to create your capacity to save and invest. Every month, you allocate a portion of your income to building up your savings and investments.
You will use these monthly savings in 3 ways:
- Constitute a precautionary saving against life’s unforeseen events. Creating a precautionary savings should be your very first use of your monthly savings: accumulate the equivalent of 3 months’ salary on a Livret A savings account. Afterwards, you can continue to increase this amount more moderately. You will also have to replenish this savings once you have drawn from it.
- Prepare your expenses: compulsory expenses and pleasure or leisure expenses. Because you have to know how to anticipate and enjoy yourself … You can do this more serenely and easily once your precautionary savings have been built up.
- Increase your assets,e. acquire income-generating assets: financial investments, the stock market, real estate, … It is this phase which, by increasing the amount of your assets, will allow you to move towards greater financial freedom, and even acquire your financial independence.
How do you pay yourself first?
Money, you surely collect it regularly, through your various incomes. First and foremost through the salary of your main job.
This main salary, precisely…
You don’t build your budget on your gross salary. Or if you don’t have a budget, you don’t plan to spend your entire gross salary. The amount you count on every month is your take-home pay. And only your take-home pay.
The state has got it all figured out: instead of waiting for you to put aside what you need to pay your various and numerous social security contributions, the state will use it first.
So, of course, the State is all-powerful and can afford everything. But that’s the main thing: it helps itself to the source before any other creditor.
So do like him! You can’t get there first. But you can come right after and therefore well before all your other creditors.
Give yourself priority and deduct your net monthly salary from your monthly savings.
What’s left will be your new monthly take-home pay. The amount deducted will be used as explained above.
Get into the habit right away. Start small if your salary doesn’t allow you to or if you don’t have a clear idea of your savings capacity. 50€ is enough. You will increase this amount gradually.
A plan of action
- Make an appointment with your banker, the one whose bank receives your salary.
- Create a monthly automatic transfer from your main account to your LDD. When it is full, you will transfer to your Livret A. This transfer should take place a few days after the transfer of your salary. By default, take the first of the month.
- Ask for free Internet access. This will allow you to monitor the level of your accounts, pay the excess at the end of the month from your main account to your passbooks and adjust the amount of the monthly transfer. You can also make reverse transfers if necessary.
That’s it 🙂
You will then only have to spend the amounts accumulated in your passbooks as needed. In the meantime, the interest rate on these 2 investments ensures that your agent will not lose any of his purchasing power.
When 2 to 3 months of salary will be present on these 2 passbooks, you will be able to reduce the amount transferred for this precautionary savings. The amount paid up will be allocated to the constitution of your assets. And when your precautionary savings have been depleted, you will replenish it by increasing the monthly amount allocated to it.
And then what?
Paying yourself first, just for the sake of it, won’t get you very far.
In fact, it’s only the beginning. And as Michael says in the conclusion of his article, I’m sure you can do better. In fact, you have to do better. Otherwise, there’s no point.
So let’s see this…
Your precautionary savings
Building up precautionary savings should be your priority. And as we’ve just seen, it’s not complicated.
When it comes to pleasure/leisure savings, the principle is the same. You can use the same passbooks as your precautionary savings, or use other passbooks, taxable those that most banks make available to us.
Increasing and managing your wealth is a little more complicated. And I’m not the best person to advise you. I will surely venture in a future article to share my experience with you. In the meantime, the simplest thing to do is to train you in trustworthy sources.
There are certainly other valuable and worthy blogs. But I’ve been following these four for long enough to be convinced of my choice. And the subjects are varied: stock market, loans, real estate, entrepreneurship, …
There are also books that can teach you the basics of these different subjects. I don’t know enough of them, so I’m appealing to nice readers who might have some reading to suggest.
Your ability to save
Over time, you will increase 3 things: your precautionary/leisure savings, your wealth … and your savings capacity.
To do this, there are 2 axes:
- Decrease your expenses. This involves your small everyday expenses, because small rivers make big rivers, and your biggest expenses (insurance, car, …). Here again, the blogs listed above will help you. In fact, by taking the voluntary step of paying yourself first, you will reduce your monthly spending possibilities and you will learn, on your own, to spend with more discernment.
- Increase your income. This is certainly not the quickest or even the easiest method. But it is certainly the most effective. There are many ways to do this: increase your salary (but it doesn’t depend on you alone), a second activity, creating a blog, … Note that this will only be really useful if you deduct a sum from this new income that is dedicated to your savings capacity. So we’re back to the very beginning: get into the habit. One thing is certain: you will be the source of this income. Conclusion: invest in yourself. Train yourself and use your time wisely.
Paying yourself first isn’t just advice that goes no further than just putting money in every month.
It’s the basis of smart money management and your personal financial strategy. It’s about putting yourself at the centre of your financial concerns, your plans and your future.
Paying myself first was the first step towards a major project: a sabbatical. It’s certainly the best project I’ve ever imagined and carried out. It is definitely the best time of my life. And that’s because, one day, I decided to put myself back at the centre of my life. And the first step towards this project was to pay myself first.
Your project idea will come later. But to start giving it shape now: pay yourself first.