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“‘I found the road to wealth,’ he said, ‘when I decided that a part of all I earned was mine to keep. And so will you.’” — The Richest Man in Babylon by George Samuel Clason

When it comes to achieving financial freedom, saving money is a fundamental aspect.

This might seem like a logical and obvious point, yet many people overlook this key element. They don’t do this on purpose of course. They do it by default, by prioritising other expenses. 

By adopting the principle of ‘pay yourself first’ you can unlock the path to financial independence. 

In this article we explore the power of paying yourself first in helping you easily—and automatically—save money from every dollar you earn.

What do we mean by “pay yourself first”?

When it comes to saving money, most people make the mistake of just setting aside whatever is left over after the weekly expenses. This is, in effect, paying yourself last.

In the 40-plus years we’ve been in business we’ve never seen this strategy work effectively in achieving financial freedom.

Instead, we recommend that you pay yourself first: This is where you make the decision to set aside a certain amount of savings every pay period before you start paying everyone else.

6 Good Reasons to Pay Yourself First

Paying yourself first is a simple but powerful principle that can transform your personal finances and help you save money faster and more consistently. By making saving a priority, you shift your money mindset and establish a strong foundation for building wealth. Let’s delve into the key reasons why paying yourself first is crucial when it comes to saving money and accumulating wealth…

1. Establish Financial Security

When you prioritise saving money, you create a safety net to handle unexpected expenses or emergencies. By setting aside a portion of your income before expenses, you safeguard yourself from relying on credit cards or going into debt during challenging times.

2. Achieve Goals

Prioritising saving increases the likelihood of achieving your financial goals, whether it’s buying a home, starting a business, or saving for retirement. By consistently setting aside funds, you make steady progress towards your objectives.

3. Reduce Debt

By putting yourself first in saving money, you reduce the risk of accumulating debt. Having dedicated funds to cover your expenses helps you avoid unnecessary borrowing and maintain financial stability.

4. Maximise Compound Interest

Prioritising saving allows you to take full advantage of compound interest. By consistently investing the funds you save, you enable your money to grow exponentially over time. This compounding effect can significantly accelerate your wealth accumulation and help you reach your financial goals sooner.

5. Build Healthy Saving Habits

Consistent saving develops healthy financial habits that contribute to long-term wealth accumulation. By making saving a non-negotiable part of your financial routine, you establish discipline and ensure a consistent approach to managing your finances.

6. Achieve Financial Freedom

At The Hendrie Group, everything we do is around making sure our clients achieve financial freedom, so this is a big one for us. Prioritising your savings empowers you to take control of your financial future. By making saving and investing a priority, you create a path to financial freedom. This freedom grants you the ability to make choices based on your passions and values, free from financial constraints.

Okay, so we agree on the “pay yourself first” principle. Let’s now look at practical tips on how to set that up so you save money more effectively.

Effective Strategies on How to Save Money

1. Set Clear Saving Goals

Define specific targets to work towards, breaking them down into achievable milestones. Clear goals provide direction and motivation for your saving efforts. It’s important your goals are things you can visualise and imagine having, being or doing. They shouldn’t purely be a dollar figure.

2. Decide on Your Saving Percentage

This is where you decide to save a certain amount before you start paying everyone else. In other words, you will put this amount away each pay period and then learn to live on what’s left.

When you think about it, this is the world’s simplest way to “create a budget” because the end goal of having a budget in the first place is so you can increase your savings and get ahead. Why not reverse the process and save the money first, then manage with what’s left over.

So, how much should you set aside? 

That’s totally up to you and your personal circumstances but as a general rule of thumb we suggest saving 20% of your net income each pay period.

From the remaining 80%, we suggest you allocate 10% to insurance and the 70% left is what you pay the bills with and fund your lifestyle.

If you don’t feel it’s practical to save 20% every pay period, then ponder this for a moment…

What would happen if your income suddenly dropped by 20%? For whatever reason. What would happen? You’d probably get by. You’d manage. Sure, you would probably trim expenses where you could and start thinking creatively about ways of spending less.

If that’s the case, why wait for that to happen? Choose to do it now.

Still not convinced you could allocate 20% of your income to saving?

Then 10% is a good place to start.

3. Automate Your Savings

Take advantage of automation by setting up recurring transfers from the bank account you get paid into, to a dedicated savings account. This ensures consistent contributions and eliminates the temptation to skip saving.

You will be getting ahead every pay period, without lifting a finger.

Choose a bank account that is not easily accessible for purchasing things. You should not have a debit card for it in your wallet, purse or phone. Shop around for an account that gives you bonus interest rates for not making any withdrawals each month.

This automation is a crucial step because it takes advantage of the principle, “You don’t miss money you never get.” If you don’t see this money in your normal bank accounts, you won’t be tempted to spend it. (Your goals from step 1 above will also help with that!)

4. Trim Expenses

Evaluate your monthly budget and identify areas where you can reduce spending. Look for opportunities to cut back on non-essential expenses such as dining out, entertainment, or subscription services. By trimming unnecessary costs, you free up more funds for saving. You’ll probably be surprised at the many expenses you can eliminate and not miss all that much.

For your regular household bills such as electricity, internet, mobile phone and various insurances, at least once a year contact your providers and ask them to price match the best competitor’s deal you can find. Often they’ll do that rather than lose you as a customer.

5. Regularly Review and Adjust

Monitor your progress towards your savings goals and make necessary adjustments as your financial situation evolves. Regularly review your budget, expenses, and savings contributions to stay on track.

Want some help setting this up?

Feel free to get in touch with us if you’d like to discuss how to best set up your automated saving and investment systems. Our purpose and our passion is to help our clients achieve financial freedom.

The Financial Freedom Wheel™

Managing your finances and staying on track with your money, tax and investments can be hard. With so many moving parts these days—in an increasingly complex and technological world—it can be hard to know where to start or what to do next.

That’s why we’ve developed our 8-step Financial Freedom Wheel™ methodology. 

Developed off the back of our 40+ years in advising clients on how to manage their money, reduce their tax, grow their wealth and create a great lifestyle for themselves and their families, we identified the 8 most important aspects that you need to plan and manage well, in order to reach financial freedom.

We’re so passionate about the Financial Freedom Wheel we wrote a book about it! 

Download a free copy of the Financial Freedom Wheel™ Worksheet here.