The term “pay yourself first” is becoming very popular among personal finance managers and investors. Instead of paying bills and expenses first and saving the rest of your income, you do the opposite. Set aside funds for investing, retirement, college, advances, or whatever is long-term funding and then take care of other things.
Step
Part 1 of 3: Determining Current Expenditure
Step 1. Determine your monthly income
Before paying yourself first, you must determine how much you should be paid. This determination starts from the monthly income figure. The trick, just add up all your sources of income for one month.
- It should be noted, the figure used is the net amount after deducting payroll or taxes payable.
- If you have an income that varies each month, use the average for the last six months, or a slightly below average number to represent your monthly income. We recommend using the lowest number so that actual revenue is likely to be greater than budget.
Step 2. Determine your monthly expenses
The easiest way to determine monthly expenses is to look at last month's bank records. Just add up any bills, cash withdrawals or money transfers. Make sure you also include cash receivables spent.
- There are two basic types you need to pay attention to: fixed costs, and variable costs. Your fixed costs are always the same every month and are usually in the form of rent, utilities, telephone/internet, insurance and debt payments. Variable costs change every month and are usually the cost of food, recreation, gas, or other purchases.
- If your spending is too difficult to track, try using software like Mint (or another similar program). With this program, you can synchronize your bank account with the software, and your expenses will be tracked by category. That way, you can monitor the latest expenses clearly and regularly.
Step 3. Subtract your monthly income from your monthly expenses
The difference between monthly income and expenses will show how much money is left at the end of each month. This number is important to know, because it will determine how much you can pay yourself first. There's no way you'll pay yourself first if you don't have the funds to pay the flat fees.
- If your monthly income is IDR 2,000,000 per month and your total expenses are IDR 1,600,000, the funds available to pay yourself first are IDR 400,000. That way, you have a rationale for how much money you can save each month.
- It should be noted that this figure could be even higher. Once you know the amount of remaining funds you currently have, you can reduce expenses to increase the remaining funds
- If your remaining number is negative at the end of the month, your expenses must be deducted.
Part 2 of 3: Creating a Budget Based on Savings in Expenses
Step 1. Find ways to reduce your fixed costs
Fixed costs are fixed, but that doesn't mean they can't be replaced with lower fixed costs. Take a look at each type of your fixed costs and see if there are ways to reduce them.
- For example, your cell phone bill may be fixed every month, but maybe your data plan can be replaced with a cheaper one. Your rent may also stay the same, but if it costs more than half your income, it's a good idea to downgrade from two beds to one, or find a cheaper place to live.
- If you have insurance, be sure to contact your broker every year to see better offers, or look for these offers from other insurance services.
- If you have a lot of credit card debt, try a debt consolidation loan to reduce your monthly fixed interest costs. This way you can pay off credit card debt at a lower interest rate than a consolidation loan.
Step 2. Look for ways to reduce variable costs
Here you can make a lot of savings. Take a look at your expenses each month and see expenses that do not include fixed costs. Look at small expenses that accumulate over time like coffee purchases, eating out, food bills, gas, or luxury purchases.
- As you try to reduce these burdens, think about what is needed, as opposed to what is wanted. Reduce the burden of the things you want as much as possible. For example, you may eat lunch at the office every day, but lunch in a cafe is a desire. You can reduce these costs by making lunch every day.
- The key to looking at variable costs is to take a large portion of the area in the budget. What is your biggest side expense? You can reduce the burden in the area, such as taking public transportation to reduce gas, bringing lunch to work, looking for cheaper recreation, or leaving your credit card at home to prevent impulse purchases.
- Do an online search to find innovative ways to reduce your hard-to-stress variable load.
Step 3. Calculate the amount of money left after saving
Once you've identified some areas for reducing expenses, subtract them from your expenses. You can subtract the amount of new expenses by monthly income to find out the amount of remaining funds.
For example, your monthly income is IDR 2,000,000 and your monthly expenses are IDR 1,600,000. After saving some expenses, you managed to reduce your expenses by IDR 200,000 per month so that your monthly cost drops to IDR 1,400,000. Now, you have Rp600,000 left over every month
Part 3 of 3: Paying Yourself First
Step 1. Determine how much you will be paid
Now, since you have funds left over, you can decide how much you will be paid. Experts suggest varying amounts. In the famous financial book The Wealthy Barber by David Chilton, he suggests paying yourself as much as 10% of net income. Other financial experts suggest between 1-5%..
The best solution is to pay yourself as much as possible according to the remaining amount of funds each month. For example, you have Rp600,000 remaining in funds at the end of the month, and a monthly income of Rp2,000,000. meaning, you can save 30% of the income figure. (You should use 20% for savings so that there are funds to cover the unexpected)
Step 2. Create a savings goal
Once you know how much you have to pay for yourself, try setting a savings goal. For example, your goal might be a retirement fund, education savings, or down payment. Determine the cost of your goal, and divide it by the number of self-payers each month to determine the length of time the goal is achieved in months.
- For example, you might want to save up to pay a $50,000 down payment on a house. If you have IDR 600,000 left and save IDR 300,000 every month, it will take 13 years to earn IDR 50,000,000.
- Therefore, increase the savings to IDR 600,000 to reduce the time to reach the goal by half (since you have IDR 600,000 remaining).
- Don't forget that if you invest your money in a high-interest account, or any other type of investment, the returns you receive will further shorten the length of time you reach your goals. To find out how fast your savings account will grow at a given interest rate (say, 2% per year), search the internet for "Compound Interest Calculator"
Step 3. Create a separate account from all your accounts
This account is intended specifically to achieve goals, usually in the form of savings or investments. If possible, choose the one with the highest interest rate. Usually this type of account limits the number of withdrawals so that you are not tempted to take money from this account.
- Consider opening a high-interest savings account. Many banks offer this account, and usually provide a return on top of a regular account.
- In the US, there are so-called Roth IRA accounts. This account allows savings to grow tax-free over time. In a Roth IRA, you can buy stocks, mutual funds, bonds, or ETFs, and these products offer higher returns than regular savings.
- Other options in the US include a traditional IRA or 401(k).
Step 4. Put the money into the account as soon as possible
If you have direct deposits, have a portion of each paycheck automatically deposited into a separate account. You can also set up automatic transfers from your main account to a separate account on a monthly or weekly basis, if you can monitor your balance to avoid overdraft fees. In essence, all of these things are done first before using the money for other things, including bills and rent.
Step 5. Don't touch your savings
Just leave the savings and don't withdraw. You must have an emergency fund for emergencies. Generally these funds are able to cover costs for 3-6 months. Don't confuse an emergency fund with investment savings. If you don't have the money to pay your bills, find other ways to earn money or reduce costs. Do not transfer these costs to a credit card (see Warning below).
Tips
- The smallest savings have a use in the future.
- Start small, if you have to. It's better to set aside IDR 50,000 or even IDR 10,000 every week than nothing at all. As your costs decrease and your income increases, you can continue to increase the amount of funds to pay for yourself.
- Set a goal, such as “I will have $20,000 in 5 years.” This will help you pay for yourself.
- The point of paying yourself first is that if you don't, you'll continue to spend until there's little left. In other words, it's as if your burden is "increasing" to achieve income. If you set aside income by paying yourself first, the burden will remain under control. If not, solve the problem instead of dredging your savings.
Warning
- If you're so dependent on credit cards that you can pay yourself first, it's all pointless. It's useless to save Rp. 20,000,000 for down payment if you also have a debt of Rp. 20,000,000 plus interest?
- It may be difficult to pay yourself first, as indicated above if your financial necessity is urgent, for example, your rent debt has been billed. There are those who believe themselves to be paid first no matter what happens, there are also those who believe that they must put others first. You must set this limit yourself.
