Pay Yourself First Method for Achieving Financial Freedom Early
One of the key principles of personal finance is “Pay Yourself First.” This applies not only to entrepreneurs but also to salaried employees who should plan their finances to prioritize themselves first. This is a simple yet highly effective technique for saving money. It focuses on setting aside funds for long-term needs, such as retirement, before paying any other expenses.
So, what does "Pay Yourself First" mean? How can you apply this savings technique? Let’s explore this with PTF in the article below.
Understanding Pay Yourself First
Pay Yourself First is a financial term that means prioritizing yourself first when managing money. By applying this technique, you set aside a portion of your income immediately upon receiving your salary. This amount is allocated for your long-term financial goals. Simply put, you save for the future before spending on daily expenses. These long-term goals may include:
- Saving for retirement
- Purchasing insurance, including life insurance and other coverage
- Setting aside funds for health-related expenses such as medical treatments, medications, and emergency healthcare
- Establishing an emergency fund to safeguard against job loss
By paying yourself first, you prioritize long-term financial stability. Instead of focusing only on immediate needs, you secure your future by saving before spending on anything else.
Why Should You "Pay Yourself First"?
To answer this, you need to understand your spending categories. Generally, expenses are divided into two types:
1. Mandatory Expenses
These include bills that must be paid, such as rent and electricity. They also cover essential needs for maintaining a healthy life, such as food, medicine, and daily necessities. Additionally, they include necessary work-related expenses like uniforms or internet access.
2. Discretionary Expenses
These are non-essential and variable expenses, such as entertainment, clothing, travel, home decor, new gadgets, dining out, TV streaming subscriptions, or gym memberships.
If you only save what’s left at the end of the month, your savings fall into the second category—discretionary expenses. Since these expenses fluctuate, you may sometimes find yourself unable to save enough due to high monthly spending. If you think about saving only after covering other expenses, it's very likely that you’ll have nothing left to save by month’s end.
However, if you transfer money to your savings account first, saving becomes a mandatory expense. You treat savings like a bill that must be paid. By paying yourself first, you are making long-term financial goals your top priority.
How "Pay Yourself First" Helps You
This technique significantly increases your chances of saving a meaningful amount each month. It shifts saving from being a “wish” to a “necessity.” Only after covering your essential expenses, including long-term savings, do you know exactly how much you have left for discretionary spending.
This method is also valuable for another reason—it teaches you to cut down on unnecessary expenses like movies or dining out to save for retirement. When you save before paying bills, you naturally reduce excess spending, forcing you to prioritize what truly matters.
How to Apply the "Pay Yourself First" Method
Starting to pay yourself first may seem challenging at first. However, breaking it into manageable steps makes saving much easier. Here are some practical ways to implement this method:
1. Automate Your Savings
If you earn enough but struggle to save, automate it. Set up an automatic transfer to your savings account every month on payday. This prevents you from overspending and ensures consistent savings growth.
You can also transfer savings manually each month, but make sure to do so immediately upon receiving your salary. This way, you eliminate the temptation to spend your savings on other expenses.
2. Prioritize Debt Repayment
If you have high-interest debt, such as personal loans or credit card debt, focus on paying them off first. Otherwise, the accumulating interest will eat into your savings ability.
Set aside a fixed amount each month for debt repayment and make these payments as soon as you get paid. This prevents you from diverting money meant for debt payments toward other expenses.
3. Invest in Insurance
When purchasing insurance, you can opt for monthly payments or pay for an entire year upfront. If monthly saving feels difficult, consider paying your insurance premium annually.
Though this requires a larger one-time payment, it frees you from worrying about monthly savings for insurance.
4. Start Small
Paying yourself first doesn’t mean opening multiple savings accounts or purchasing numerous insurance plans all at once. If you’ve never saved before, start small.
Begin by saving 500,000 to 1,000,000 VND per month, ensuring that it is saved before any other expenses are paid. Over time, this habit will strengthen, and your financial discipline will improve.
Conclusion
Above are the key insights into the “Pay Yourself First” method. Hopefully, this knowledge helps you move closer to achieving financial freedom in the future. Don’t forget to visit PTF regularly for more valuable financial tips!
