Pay Yourself First

Building financial security is all about being disciplined now – by paying yourself first – so that you benefit later in the future.

So I established in my previous blog that when your post-tax pay cheque arrives into your account at the start of each month, the average person will see approximately 60% vanish on bills, direct debits, subscriptions, standing orders and rent or mortgage payments (ugh, how depressing is that?!).

That leaves you with 40% each month to play around with.

40% should then be further subdivided into the following categories:

20% fun money to spend on yourself for the month

10% into your savings account

10% into your investment account

Obviously you can dial up or dial down your ratios but this is not a bad starting point.

The golden rule of today’s post is all about “Paying yourself first”.

Paying yourself first

What do I mean by that?

I mean that you siphon off 10% into savings and 10% into investments out of your current account on the 1st of each month so you are not tempted to spend it later that month.

By diligently contributing 20% of your pay cheque towards your future you will be one step closer to being more financially secure than if you just blew it on 10 tequila shots in the bar post-lockdown!

If my maths is correct, you should then have only 20% of your pay cheque left on the 2nd of that month. 

This is then your ‘fun money’ that you can spend however you wish! 

To help separate out my ‘fun money’ I actually set up a direct debit from my main account (the one that receives the income) into a second current account. 

This second, separate account also has a separate debit card that I use for everyday things so in my mind I know that I have that fixed amount and only that to spend on myself for the month.

That way it is much harder to then dip into your savings or rainy day fund when it is in a whole, separate account.

I do not use my orignial/main current account debit card at all, I lock it away (figuratively speaking) so there is no way I can use it if I decide to go cray cray one month and spend all of my “fun money”.

If you want to do what I do to help assist with that mental compartmentalisation with your money, go setup that separate account. It helped me!

However, the new bank will offer you to make a ‘full switch’ and close your old bank account so ensure you say no because the whole point of this exercise is to keep 2 accounts open and use them for different things. 

Your original/main current account is for all your bills, direct debits and standing orders etc..

While your shiny, new second current account is for your “fun money” ONLY – capiche?!

It is also important to keep your original bank account open for credit score purposes – it demonstrates you have a track record with the bank. 

See my previous blog posts for ways to boost your credit score.

Savings account

Now with interest rates depressingly low with all savings accounts out there at the moment – 0.01% or thereabouts – it doesn’t really matter which one you go with.

You can either stick with your original bank and create a savings account with them or go shopping online for a one that offers a better rate.

Moneysavingexpert.com is great for that.

Another savings account to consider (one that I save with) is NS&I – National Savings and Investments – which is backed by the UK government so you can’t get any safer than that really.

It helps me sleep at night, as they are not going bust anytime soon!

Plus, they pledge to compensate you up to 1 million pounds if anything was to happen.

Conversely, other banks that are insured by the Financial Services Compensation Scheme will compensate you up to £85k so whichever account or provider you go with – be sure to check they have FSCS backing!

Investment account(s)

This is a topic I will not cover today but I would advise that you start investing in something monthly, however small, to insure you make the most of time in the stock market.

Time is your only friend in this game.

There are many banks, robo-advisor apps and IFAs (independent financial advisers) out there that can help you with this but I would advise doing your research first before committing to a certain platform – i.e. look at their fees!

Watch this space for more on this topic in future posts.

So, there you have it. A brief summary of where your remaining 40% of your monthly salary should be going.

It is definitely worth noting here that if you have any debt (especially any sum of money owed with a high interest rate) then focus on paying off your debts first before saving or investing.

Why? Because the annual return (interest gained) on your money in savings and investments put together will be far less than the monumental interest accruing on your unpaid debt that you owe your lender!

Before I end, below is an account of what I do to help you to visualise what this whole post is about:

[Last day of the month] Post-tax pay cheque arrives → My (original) main current account

[1st day of the month] 

Direct debits/bills/standing order/debt payments/rent or mortgage payments leave my main current account

Direct debt of ‘x’ amount goes into → My (new) subsidiary current account – “fun money”

[2nd day of the month]  “Paying myself first”…

Direct debt of ‘x’ amount leaves my main account → NS&I income bonds – “general savings” 

Direct debt of ‘x’ amount leaves my main account → NS&I premium bonds – “emergency fund” savings account

Direct debt of ‘x’ amount leaves my main account → Vanguard stock & shares platform – “investments” 

I hope that makes more sense now.

You can see that I use my new account for every day expenditure (cafes, restaurants, haircut, presents, food shopping and other social activities etc)

Whereas, my original account is for all my fixed, monthly expenses.

So by the 2nd day of each month I am only left with fun money to spend and once that is gone. It’s gone. None left until the next month. 

By having separate accounts it makes it much easier to keep track of my total expenditure for each month.

TO DO

If you need that mental compartmentalisation to reduce that temptation to spend more than your allocated fun money amount then set up a separate bank account.

Setup direct debits to automate those payments on the 1st of each month into your savings and investment accounts.

Give yourself a fixed amount to spend each month and test yourself – can you stick within your budget? 

It’s the ultimate test of self discipline……….that, and trying to say no to a custard slice from Patisserie Valerie!!!

NEXT TIME

I will cover the importance of an emergency fund/rainy day fund/contingency budget! 

HEALTH FACT

Protein in your diet is very important.

Regardless of whether you want to build or maintain muscle mass, there is little point in eating over 40g of protein per sitting.

This is because 40 grams is the maximum your kidney(s) can process so any more than that will be wasted and excreted through your urine.

DISCLAIMER

This blog is for educational purposes only and should not be construed as financial advice. It is purely opinion-based.