Pay Yourself First ... and other Lessons to Live By

Monday, 01 December 2008 22:40

One of the fundamental pillars of any personal finance strategy is to pay yourself first. However, for many of us this simple approach to our finances appears to be the hardest to master.The phrase “pay yourself first” is by no means new. In fact it is right up there with “take care of the pennies and the pounds will take care of themselves” and other such idioms. However, the advice really does work and should be the foundation of any personal finance plan.
If we were to really examine our finances we would find that we actually often pay ourselves last. We pay all of our outstanding debts to other people first and then if there is anything left over we pay ourselves. This is absolutely the wrong way round!So, how much should we pay ourselves? The answer to the question is that it is up you. A good rule of thumb is that you should pay ourselves at least 10 percent of your salary. Try it! It’s easier than it sounds.

Sticking to a Budget

And once we have mastered the ‘pay ourselves first’ approach we can then tackle budgeting. For many of us creating and sticking to a budget is boring. However, it is essential if we are to reach our lifestyle goals.The key to being able to budget successfully is an ability to look at saving in a different light. Instead of focusing on the means – the chore of saving, we should look at the ends – the result of saving. The result could be anything from buying a new car to booking a special holiday to enrolling at a top university – anything that has special value for us.As soon as we realise that money is the means by which we are able to achieve our financial goals then budgeting becomes a lot easier. In fact, it becomes a mere tool to assist us in reaching our lifestyle goals.

A Comfortable Retirement

With budgeting under our belt we can now tackle the age-old issue of retirement. As was pointed out in previous columns many of us underestimate the amount of money we need to live comfortably in retirement. Many of us also underestimate our life expectancy upon retirement.Those who take action over their retirement early have a much better chance of retiring comfortably. So that is exactly what we should do – act decisively and act early!

We should aim to have enough money saved up to enable us to draw 4 to 5 percent of our savings per year over a 25 year-period. For example, savings of US$800,000 would allow us to withdraw US$32,000 to US$40,000 per annum. One of the best ways to achieve such savings is to contribute to a regular savings plan. In the U.K. and the U.S. tax-free plans are set up for employees. For those of us who do not have such plans we can create our own using mutual funds that allow us to diversify and pool our resources with other investors. We should aim to achieve at least 10 percent return on our investments per year – and we should invest for the long term.

Even if we are already set up with savings and retirement plans we should always consider additional investments as part of our diversified portfolio. And if we are considering further investments exchange traded funds are a good way to go.They are often set up to track a particular market index such as the Dow Jones or even the developing markets or commodities such as gold. They are simple to understand and easy to invest in.

Trevor Keidan is Managing Director of Infinity Financial Solutions. This company provides impartial, tailor-made, personal financial advice to clients in Cambodia and Southeast Asia. Should you wish to contact Trevor please send an email to This e-mail address is being protected from spambots. You need JavaScript enabled to view it