Pay Yourself First and the Money Rules
Sometime ago, in my formative years, I remember an instructor asking the class, “What’s the first thing you do after you receive a paycheck?” Almost all the hands went up to answer this one. This was a shoo-in!
One student said, “Cash it!” Another said, “Put it in the bank.” … “Pay bills.” … “Buy a new outfit.” Of course, these answers weren’t wrong but they also were not correct, according to the financial principles that this instructor was about to introduce to the class.
Pay Yourself First is the Golden Rule of Personal Finance, but Are You Abiding?
Pay yourself first works like this: 10-20% of your income (paycheck) should be
set aside for yourself before paying any other bills, creditors, or debts. In essence, save before you spend.
Many of us learned this concept of keeping at least ten percent of our pay for ourselves. But how many of us actually follow through on this? Knowing is something completely different than doing.
A good number of workers live paycheck to paycheck. Many are only one paycheck away from financial dire straits. Now, in the current economy this isn’t so astonishing.
A good portion of it comes down to how we are managing money. Living paycheck to paycheck does not equate to being poor. Quite a few middle-income earners fall into this category.
Yes, there are very real economic conditions that have placed financial constraints on the middle class. At some point, though, we have to know where to draw the line between what is systemic and what is within our control.
For workers whose earnings only cover their primary expenses (housing, utilities, food, transportation, insurance, etc.) it is plausible that one emergency or the loss of income could upend them financially.
When a worker, however, has a surplus after all the bills are paid (necessities and discretionary) the question becomes how is that money being managed?
There are people who struggle financially not because they don’t have enough money but because they don’t know how to manage the money they do have. I used to think of this as a good problem to have.
I believed that any problem that is solvable is a good problem. But what if those with this particular problem don’t know an easy resolve?
While I stated earlier that many of us learned to pay ourselves first, conversely, there are those who never learned basic financial principles in school or at home. Even those of us who were taught basic financial literacy aren’t always effective in applying what we were taught.
When the Money Flows but You’re Not in the Know
I delved into this a little further and came up with a few reasons some people with ample money don’t know how to properly manage it:
- Poor decision-making
- Not making rational choices. Think of impulse spending. Many people are wired to seek immediate gratification and will spare no expense, especially if they feel they can afford it. These people tend to make decisions about money based on emotion, not logic.
- Lack of financial literacy
- As stated above and reiterated here. Some people never received any tutelage in the area of financial management. They never learned the importance of budgeting, saving and earning interest, or minimizing debt. And if they did learn it at some point, they fail to apply it properly.
- Lifestyle inflation
- The more money these people make, the more they spend. Add to this the social pressure they may give into with keeping up with others or their peer group, materially. These people may follow a status culture where looking the part supersedes the reality of their financial reach.
It is common now to hear about the six figure earners who report that they are struggling financially. In high cost of living cities and regions this seems like a reasonable reality. Inflation, higher food costs, insurance surges, rising utilities and gas prices has all of us reeling (even the ones who can afford it).
Honestly though, not all six figure earners are struggling and many of them are thriving even with the inflation drain. All things being equal, the difference between those that are struggling and those that are thriving comes down to money management.
The strugglers are more likely to check off at least one of the three causal factors listed above. The thrivers, on the other hand, have the financial literacy and know where and how to effectively apply it.
The 10 Essential Money Rules
Remember pay yourself first? Well, thrivers know this golden rule and they know about other tenets of financial wellbeing. They are also more likely to continue seeking out new information on how to best manage and invest their money.
Financial literacy isn’t something that we are born with. It is something that is taught and can be learned by just about anyone. For people who are set in habitual patterns of overconsumption it becomes more a matter of unlearning. It’s never too late.
If you would like to learn about some other financial principles (in addition to pay yourself first) or you just want to brush up on them to reinforce your financial practices, please feel free to download this handy guide.
Download Your Free Copy of the 10 Essential Money Rules!
This guide will show you:
- Learn how these rules work together to create a financial system
- Income – expenses = surplus
- Surplus is distributed into savings and investments
- Investment + time = growth via compounded interest
- Emergency fund + low debt = protection and leads to financial stability
Happy financial wellbeing to you!
