Most people do budget by accounting for bill payments, monthly expenses, and saving whatever is left after all of that; the smarter approach would be pay yourself first.
What is ‘pay yourself first’ method?
The ‘pay yourself first’ method of managing finances is simple and very effective. The tactic involves setting aside a percentage of one’s income for saving before spending on other things, whether it is payments, food, or entertainment. The strategy involves putting your savings first, which will build a safety net that will enable you to fulfil all your future economic objectives, from saving for an emergency to preparing for your old age.
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The pay yourself first method flips traditional budgeting on its head. Instead of:
Income – Expenses = Savings
you follow:
Income – Savings/Investments = Expenses
How is it different from conventional budgeting?
The conventional method of budgeting may place considerably more emphasis on expenditure rather than savings. This is often the case, whereby people will spend most, or actually exceed, their incomes. This will impede growth towards your objective. The method ensures that your savings become non-negotiable.
Getting started – step by step
You do not necessarily need to invest in every financial goal. You can sort financial goals into short, medium, and long-term. You can invest in short-term goals initially and gradually move towards medium and long-term goals. Even bank standing orders for mutual fund SIPs, recurring deposits, or insurance premiums can make the process extremely easy.
How to make it work?
The “pay yourself first” approach must allow flexibility. Firstly, make a list of the financial goals, like:
Emergency fund
Term life insurance for the family breadwinners
Health insurance for the entire family
Child higher education and marriage fund
Retirement fund
Down payment for purchasing a house
Annual vacation
Purchasing a vehicle
Fund for starting a business, etc.
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How to stay on track without sacrificing essentials?
The difficulty lies in controlling expenses with the remaining income. Basic expenses like groceries, EMI, and bill payments cannot be cut down very easily. Begin by cutting down discretionary expenses and implementing practices such as 50/30/20 until you are ready to implement the Pay Yourself First technique. The policy splits expenses into 50% for needs, 30% for desires, and 20% savings.
Should you try it?
It takes a very short period to gain financial freedom if one implements the pay yourself first approach. The pay yourself first approach is one of the successful ways to meet financial goals within a short period. It may be a challenging task at first, but one can incorporate this approach by starting with other budgeting techniques and becoming accustomed to the pay yourself first method.
{News Ei Samay does not provide investment advice anywhere. Investment and trading in the share market or any field involve risk. Proper study and expert advice are recommended beforehand. This news is published for educational and awareness purposes.}
