A phrase I keep seeing around the personal finance blogsphere is the “pay yourself rule”, especially when relating to financial freedom and early retirement. Both of which is what we are aiming for, so it’s important to know what this rule actually is!
The pay yourself rule is nothing to do with earning money, but in fact a way of saving it. The rule of thumb is to automate a payment to your savings account or investing account the day you get your salary. That way, you cannot spend your money and you get to meet your savings and investing aims. If you do this, then you ensure you meet your saving/investing aims before you do anything else in the month, which is a vital key to having enough to retire early on. It also becomes a habit, whether you automate the payment or do it manually every month, which in turn will make meeting your goals even easier.
If you leave your saving and investments until the end of the month, chances are you probably find yourself without the amount you would like to transfer to savings. Those little discretionary spends throughout the month add up and, before you know it, you are left with very little at the end of the month. If you save your target amount at the beginning of the month, then you are to live on what is left. It can also help with budgeting, as once the money is gone, then it’s gone. It can be quite a hard lesson to learn!
This is the system we use for our savings, which works for us 90% of the time. The only time when this has not worked in recent months is when we bought a new-to-us car, which then needed insuring and taxing. Every other time, this is how we do our savings. When I get paid at the end of the month, I automatically transfer money to savings, hopefully close to what I aim to achieve in my monthly aims. We then live on what is left, plus my husband’s salary for the duration of the next month. There have only been a couple of occasions where I have transferred over a set amount and by the end of the month we’ve had barely anything left in the pot. But, then it’s a good learning curve for how our expenses can rise if we’re not paying attention.
Creating a system which ensures stability and progress, every single month, can accelerate the path to financial freedom. But, a lot of people worry that they won’t have enough income to survive the month once they’ve transferred their savings. But, the only way to learn this is to implement the system and learn as you go along. You will soon see patterns in your spending habits and ones which are probably unnecessary to your budget. This system will also put into your question your own priorities in terms of saving for early retirement/financial freedom/debt repayment/any other saving goal you may have, because it will look at what you consider to be more important. If you think that this may be hard, start off with 5% of your income transferred on payday. If this is easy by the end of the month, then increase the percentage over time. That way, your savings/investments grow and you get into better budgeting habits. It’s a win-win situation!
Do you use the pay yourself rule? If not, why not?