Pay Yourself First!
This principle states that we should put aside a portion of our monthly income into an account called, “My Account” first. The key word is FIRST and you do not touch this money (at least for the first 2 years of doing so). 95% of the people out there do the opposite. They will pay everything else: BILLS (rental, mortgage, mobile, utilities, transport etc) first, before themselves (after whatever is leftover). There is a vast difference between the 2 approaches; with the former giving you the foundation of reinvested fund (expand your asset) and limiting your expenses (liabilities), and the latter seeing you trapped in a financial whirpool.
The recommended min amount of paying yourself is 10% of your monthly income. You should increase the percentage amount as you age depending on your retirement goals. Personally, after M&Y, I change my mindset and start paying myself 70% (I am aggressive in achieving my financial freedom and willing to forgo instant gratification) and after 3 1/2 years, I am seeing this principle having a big impact in my life:
1. My investment options have widened, thus tapping into more investment opportunities;
2. My bargaining power is higher because I have low needs;
3. I can stomach certain calculated risk especially in new business ventures apart from my usual investment asset classes, and
4. I plough the annual return in getting more return. This resulted in producing more return at a compounding rate! The snowball effect is amazing after I keep doing it for 3 years.
Graduates of Money and You graduate knows this principle because it was taught in the program. Some financial books put this as key stepping stone toward financial freedom. And yet, seldom do people practise it in real life. Just take a look below on one article that was published in a magazine recently,
None of the interviewees said that they pay themselves first! And the most interesting reply came from the lady on the top left corner, she stated,
“Karaoke, drinks and a good meal with friends, to celebrate surviving another month, about $50 each. I’ve just bought a large-screen TV! It cost me half my pay, but it’s an investment.” - Ng xxx xxx, 27, accountant
There is no right and wrong and I respect the interviewee’s way of life. Most importantly, her particular reply reflects a reality in our society:
1. Many are surviving from paycheck to paycheck. And most hate what they do for a living (especially after 3-5 years). Thus, the majority need some “retail therapy” to make them feel happy and gain that pyschological balance for the moment. But the lousy feeling will set in again since they keep doing what they hate for a living. This “retail therapy” session will get more expensive especially as time passes. To put oil into fire, some “empathic financial insituitions” who understand your pain will want you to spend more: Money in advance to gain that high end toy! This whole cycle will repeat itself again till you digged a deeper and deeper financial hole without seeing it and get trapped eventually. And that is why it is common to see people bursting their credit cards limit. Or people who starved themselves silly in order to pay for the monthly installment of that fancy car or high end Condo they bought (in order to fit in what society term as “successful”). I learnt that “Many spend their life earning a paycheck rather than designing their life”. In another word, many PROSTITUTE their time for money! A nicer term would be ”Rat Race”.
2. Many are still financially unaware on the true definition on what is an Asset and Liability. TV is an asset? I nearly flipped after reading the short article especially coming out from an accountant. Before you challenge me on any accounting definition, allow me to share with you how the rich define asset = anything that put money in your pocket, liability = anything that take money out from your pocket. Period. Simple right. But yet the school has never taught us anything about managing money.
Disclaimer: The above definition excludes children/parents or your loved ones. 
So go on. Start a Pay Yourself plan and stick with it while you are young and able. You will see your life change (Please consult a professional for those who are nose deep in debt. You may need a differ approach).
I look forward to your comment.
P/S: Forward this blog to your friends if you feel that they might benefit from it. Thanks!
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vivienne said,
December 27, 2006 @ 2:49 am
Some people, consciously or unconsciously, are afraid of having debts over their heads and they would choose clear all debts over paying themselves. For those who don’t pay themselves, got debts and have a bad relationship with money, there is this simple and wonderful book call “The Richest man in Babylon” by George Samual Clason that would you if you practice the few basics.
Wei Han said,
December 27, 2006 @ 3:21 pm
So vivienne, for those who prefer to clear their debt before paying themselves, and yet doesn’t have very bad relationship with money, what do they do?
Also, correct me if I am wrong Ken, but I think along this line. Only if you invest the money that you pay yourself into places where the net interest grow/expand faster then your credit interest, if not I would rather clear my debt asap. Could I have your view on this statement?
Thanks
ken said,
December 27, 2006 @ 6:58 pm
Hi Wei Han, this is an excellent question and before I answer, I assume that you are not in any nose deep financial crisis situation.
My humble opinion is NO. You still set aside the amount that “PAY YOURSELF FIRST” account. I discover if you do not start practising it early and fast, you NEVER WILL! And there is always that bills first in your life. This form a habit in many people life: Their bills and debts will always come first and they will always be trapped in bills and debts.
P/S: The debts I am referring to is BAD DEBT: Consumer Debt.
Prisca Ooi said,
December 29, 2006 @ 3:51 pm
Dear Ken,
I totally agreed with you.I love the way you put it as well.In fact I have a great learning lesson from Money and You - “Pay Yourself First”. After I’ve learned the meaning of Assets and Liabilities and putting the learning experiance into my life, I saw a huge change in my Net Worth Sheet, from -ve cash flow to +ve cash flow. If I would like to utilise my saving to pay off all my liabilities, I will still have money left in my pocket. The greatest joy that I have in financial now is to see them grow and I just start to enjoy them recently. Cheers
Phaik Imm said,
January 2, 2007 @ 8:30 am
I do agree that we should pay ourselves first. I was doing that even before M&Y programme. My lifestyle is simple ie not too expensive car, cheaper house etc. To me is the matter of choice, to look good with big flashy car or to have money in the pocket.
I understand that for some, it is a struggle to make ends meet. Then it will be difficult to pay oneself first. I would suggest that reasses the financial standing and make some decision eg a second job, going to cheaper house, smaller car etc etc.
I am just sharing my thoughts.
vg said,
January 2, 2007 @ 10:19 pm
Dear Ken,
As wei han says, rather concenrate on clearing the credit which has high interest than pay yr self first as saving interest is so low 3% where else yr hsing loan is 7%,
do you save to make bank richer? unless you have disposable income that you want to send aside….
that’s my opinion….
ken said,
January 3, 2007 @ 1:20 am
Hi VG, thank you for your comment.
Wealth is a habit and one must start by “paying yourself first”. While the fund grow steadlier in the bank, one should start looking at opportunities to grow the fund. That fund is the bullet. Unfortunately, I see many friends missing all the opportunities because: 1. No resources/cash, 2. They are so busy paying off debts all their lives!
Importantly, this habit also limit oneself expenses and spending because one has to actively allocate remaining resources on other things in life such shelter, transport, clothes, foods etc. If one cannot afford to buy that latest car now, take public transport first, if taking public transport is not an option, ride a bicycle to work. If one cannot pay for a Condo now, buy a HDB flat first, if buying is not an option now, Rent first (by the way, HDB interest rate is one of the lowest at about 2.4% annually if you are a Singaporean or PR here). If one cannot afford to travel to Europe now, go to nearby countries first. All these done with the goal toward financial freedom. Unfortunately, Capitalism encourages “over spending” and “Instant Gratification” especially in our generation. Many started with the wrong foot forward and my intention aims to address this attitude. The question is how strong is your desire toward true financial freedom?
P/S: Example, if one invest in S&P500 index fund, one would generate 15% returns annually (average out 30 years).
PP/S: I would strongly encourage one to invest in some form of financial educational program before embarking on any investment. Pls note that I use the term, “Investment”, not “Trading”. Thanks!