Core Concepts
Pay Yourself First” is a financial principle that emphasizes the importance of prioritizing savings and investments before spending on other expenses. It suggests that setting aside money for savings and investments should be a top priority in order to secure your financial future.
Although this principle is widely recognized as beneficial, many people struggle to follow it due to psychological limitations. We are often inclined to be spenders rather than savers, finding it easier to plan how to spend our money rather than save it.
To better grasp this concept, let’s draw an analogy with exercise. Just as experts recommend exercising in the morning for better health, “Pay Yourself First” advises setting aside money for savings and investments as a healthy financial habit. However, similar psychological barriers can prevent people from finding time to exercise in the morning. Similarly, individuals may find it challenging to prioritize saving money unless they consciously make it a habit.
By consistently applying the principle of “Pay Yourself First,” diligently saving and investing before allocating funds to other expenses, you can significantly increase your chances of accumulating wealth and achieving financial stability.
How to Become Rich by Pay Yourself First?
To become wealthy by following the “Pay Yourself First” principle, you can follow the steps outlined below:
1. Determine your mandatory monthly expenses: Start by calculating the amount you spend on necessary expenses each month. This will give you an idea of your financial obligations.
2.Determine your savings and investment amount: Assess how much money you can save from your income. It is recommended to save and invest at least 10% of your monthly income as a starting point. This amount can be adjusted as your income and financial situation evolve.
3.Automate your investments: Once you’ve decided on the amount to save and invest, set up an automated system that deducts this portion from your paycheck and directs it towards assets that offer potential growth or generate passive income. Consider options such as mutual funds, stocks, Public Provident Fund (PPF), real estate, or Indexed Universal Life (IUL) policies.
4.Build a stream of passive income: Over time, your investments should start generating a steady stream of passive income. This can come in the form of dividends, interest income, or rental income, among others. Aim to reach a stage where your passive income covers all your expenses. This is known as achieving Financial Independence.
5.Reinvest for greater wealth: Once you have achieved Financial Independence, you can redirect your entire salary or income towards acquiring additional assets that generate even more passive income. By consistently reinvesting your earnings, you can further increase your wealth and financial stability.
By following these steps and making a habit of paying yourself first, you can progressively build wealth and attain financial freedom. Remember to adjust your savings and investment amounts as your income grows, and regularly review and diversify your investment portfolio for optimal results
Savings
Saving money is just as important as spending it. Developing good saving habits is crucial for accumulating wealth. Many people overlook the importance of saving and use the wrong approach when it comes to saving. What is your savings formula?
There are three savings equations to consider:
1.Income – Expenses = Savings: This formula often leads to little or no savings as most of the income is allocated to expenses, leaving little leftover for saving.
2.Expenses – Income = Savings: This formula is considered the worst approach to saving money as it assumes that expenses are prioritized over income, potentially leading to excessive debt and insufficient funds for both savings and daily expenses.
3.Income – Savings = Expenses: This formula is the recommended approach to saving. By automatically setting aside a portion of income for savings before allocating funds to expenses, the habit of saving is developed, creating a solid foundation for wealth accumulation.
It is essential to understand that saving is a habit that needs to be consciously cultivated. Regardless of the specific amount saved, the act of consistently setting aside money creates the discipline necessary for long-term financial success.