Pay Yourself First

The most important starting point on whether you are building wealth or heading towards financial disaster is whether your save every month. Or in other words, spending less then you earn.

Money has this peculiar habit of slipping out of our hands very quickly. Before you know it, you are left holding nothing but air in your hands. Or as the Malay saying goes “Gaji habis, bulan belum habis” (your month is longer than your pay check).

“Monthly income RM10,000, monthly expenses RM6,000 results in happiness. Monthly income RM10,000, monthly expenses RM11,000 result in misery.” ~Adapted from Charles Dickens

The whole idea is to save before spending money on wants or things you do not really need. So how do you make sure you are on your way towards happily saving?

The Concept of Paying Yourself First

Take yourself as if you were an employee for Me Company Sdn Bhd. Every month, your number 1 priority is to make sure that you get paid. The moment you receive your pay, set aside the amount into another account that you will not touch!

This amount you pay yourself every month should be used for your emergency savings (if you have yet to reach your emergency savings goal) or to be invested.

How Much to Pay Yourself?

Only you can decide how much you are worth and how much to pay yourself. It can be a percentage (e.g. 10-30%) or a fixed figure (RM500, RM1000, RM2000, etc).

Suggested guidelines as follows: –

Employee with EPF/pension: 20% of your income
Self-employed or no EPF contribution: 40% of your income

How to Pay Yourself First?

Set up an automatic transfer for your funds every month so it automatically gets transferred without you having to do anything.
Move your savings into a different bank (preferably without an easily accessible ATM card or transfer mechanism).
Set a goal and track your progress on how much you are saving.
Set clear objectives to your monthly paying yourself first so it is more real for yourself. This can be to build up your emergency fund, investing or other financial goals.

How to pay yourself first if you are self-employed?

More and more people are self-employed these days whether as a freelancer, entrepreneur or business owner. One of the key challenges of paying yourself first is if your income is unstable or varies greatly from month to month.

You can and will still want to practice paying yourself first but to look at things on an annual basis instead of monthly. Use the average of the last few years to estimate what your annual income will be like. And then set a percentage goal of how much you will pay yourself first, ideally at 40% or more of your income. Then further breakdown this 40% into the different pay yourself first buckets that you have.

Whenever you receive income, automatically set aside that 40% of your income into your pay yourself first buckets. Leave any extra as a future buffer for upcoming monthly expenses. If you are in a negative and don’t have enough to survive, dip into the future buffer but don’t forget to continue paying yourself first for any income received based on the goal (i.e. 40%) that you have set.

Where to Pay Yourself First?

The most important part of paying yourself first is towards your emergency savings if you have to meet your emergency savings goal. Once that has been achieved, you will want to start paying yourself first by investing into different financial goals and investments aka financial buckets.

Examples of Pay Yourself First Buckets

Savings: emergency savings or saving up for other purchases
Investments: to invest into asset classes such as equities, bonds or other investments
Property fund: to save up for your property downpayment or pay off mortgage debt
Education fund: to fund you or your children’s education costs
Travel fund: to fund for your leisure holidays and travel

FAQ

Q: Should I pay yourself first or pay for my bills and other expenses?
A: The whole concept of paying yourself first is that it is the first thing you do once you get your pay or income. This means paying your various paying yourself first buckets first before paying your bills, buying groceries or any other expenses. Your budget should have been properly setup knowing your income and expenses so that you will have sufficient funds for all your expenses even after paying yourself first.

Q: Must I automate paying yourself first?
A: Yes it may make things easier for paying yourself first to be automated instead of manually doing all the transfers every month. Many investments will allow you to make regular savings/investments by direct debiting your account. You can also setup regular transfers or standing instructions for the rest of your pay yourself first goals.

Q: Should you target saving 40% of your gross or net (take home) income?
A: Ideally you should be saving a percentage based on your gross income. But at the very least do try to save 20% of your take home pay (or 40% of your take home pay if you’re self-employed).