Hit the 20% Off First for Yourself

I’m not talking about a 20% discount or sale. I’m talking about giving yourself first a cut of 20% from your earnings before giving them away to others.

It is funny when we get busy paying our bills and dues without even stopping to pay ourselves first.

Let me propose this to you:

Pay Yourself First, Make it 20%

Let me answer three questions associated with this.

1. Why should you pay yourself first?

You have to pay yourself first to align your financial system with the money strategy of the rich.

I’m sharing this not because I am already rich but because I have seen how the system works and have started applying it. And in my small ways, and if I continue to do this in the long haul, I will be able to hit my financial target.

I’m relaying this not because I’ve read it in a book or have heard it from someone else but because I have suffered the pain of not following it but also started experiencing the product of following it.

I have started working as a Certified Public Accountant with one of the top firms in the country in January 2010. My pay was not that big as what my kababayan thought of but it was sufficient to finance my expenses and there’s a little extra to keep as my savings.

Being the accountant that I am, I opened an Excel spreadsheet and encoded my salary amount. Then I plotted my expense list. Afterwards, I determined the difference, there’s something left. I told myself, “This will be my saving every pay day. This will be what I’m going to keep every fifteen days.”

So my plan was fixed. My budget was on. My savings program was launched.

Along the months, I kept my expenses at the minimum. Working at the Makati Business District poses a challenge in keeping my expenses small but somehow I managed to do it. For my meals, I would walk around the street corners of Ayala Avenue to look for the inexpensive yet pretty decent meal for a yuppie like me. Given my schedule and other arrangements, cooking at home is not always the convenient choice.

So there I was keeping my expenses small, not even tried to take a sip of frap or cappuccino at the classy café. I’d walk to and from the office. I was like a mountaineer traversing Ayala Avenue everyday – the difference – there is no peak to assault.

So my expenses were kept low – that was what I thought. But after a year, when I received my bank statement — voila, “Where’s my savings?”

What I didn’t know was that while I was maintaining my expenses at the minimum, when I see something extra in my bank account, I pulled it out and use it to pamper myself, for some Friday gimmicks, and for some things that I don’t even remember.

It is not bad to spend some extra for your entertainment and enjoyment but it is also very important to keep something for savings.

All the while, I thought I was maintaining my expenses at the minimum but there’s something wrong in the strategy that I used. I was using the wrong strategy of saving.

The strategy I was using was what they call as the poor man’s strategy. The sequence followed in this wrong strategy is this:

1. Receive your income.
2. Pay your expenses.
3. Save what’s left.

The wrong thing in this strategy is that expenses come first before savings.

Based on experience and observation, expense list is bottomless. As long as you have cash, more and more is being added on the list of expenses. Some even are being justified as assets or investments in the wrong way. My friend once asked me, “Why do they say that a watch is an investment?” I looked at him with a blank face and answered, “I don’t know either.”

So there, after a year of earning and even with the thought that I was saving, nothing was saved. At the end of one year, I received a zero-balance bank statement.

Thankfully, the agent of change came in.

Some months after that, as I moved to my next job, I also moved to new strategy of saving. And this is my proposal to you to follow as well. You don’t need to experience the pain that I experienced before you follow this.

Imagine yourself after five or ten years. Visualize all the amounts of money that you will have been earning. Those were huge amounts. Probably, you should have savings and investments after those years. But then when you check your bank statement and your investment portfolio, you have nothing.

But you now have the choice to turn the situation around. Because you started paying yourself first, you can now see that you are hitting your financial goals. You now have savings and investments.

Now, let’s spell out the correct strategy that will help us in the process…

Pay yourself first, make it 20%!

The strategy that I started using is this:

1. Receive your income.
2. Save. Pay yourself first.
3. Spend what’s left.

2. So what will you do to the 20%?

The 20% you keep can be transformed into three important funds – emergency, retirement, and business funds.

When I started doing this, I was able to save some amounts. I was able to start investing in the stock market. I was able to finance the publishing of my first ever book. I was able to help a family member who had to spend for some hospital expenses. (I know it was small but at least I was able to help.) I was also able to set aside some amounts to be able to attend seminars and sign-up for worthwhile programs for my development as a person for the betterment of my way of being and my finances as well.

The 20% that you keep will serve as your funds:

a. The first fund that you can have with your 20% is your emergency fund.

Emergency fund accounts to three to six month’s worth of your expenses. By the name itself, it will be for emergency. Just in case you lose or quit your job, this will support you while looking for the next one. Just in case a member of the family needs financial help, this will be an alternative source. Just in case of emergency, you have something to pull money from.

When this is being used up, it should be replenished immediately. This is also usually kept in the bank in a regular savings account so it is convenient to withdraw when necessary.

But once this is filled to the brim, you don’t add it anymore. Because you are to fund the next one.

b. The second fund that you can have with your 20% is your retirement fund.

This can be your stock market investment – something that you will keep for the long term. And I suggest you enter the stock market as a long term investor and follow the EIP program advocated by COL Financial or the SAM strategy taught in the Truly Rich Club.

Think of it as something for your old age that’s why we call it retirement fund.

c. The third fund that you can have with your 20% is your business fund.

You can have something to start a business in due time.

3. Why 20%?

20% is the starting point.

The 20% can be associated to the Pareto rule. The 20% will work wonders. You’ll see it when it comes.

It is also associated to the story of the Biblical figure named Joseph who saved the land of Egypt from famine for having been able to save 20% of their harvest for seven years. (Read the story in the Book of Genesis.)

This a figure that you can start with and make it higher as you wish as you move on to more earnings, more savings, and more investments.

To help you apply this immediately, here’s my action tip for you to take.

This is what I did and have worked for me in keeping the 20% every pay day and paying myself first in the process:

1. Open an account with the same bank as your payroll account.
2. Register for online banking.
3. When pay day comes, transfer the 20% of what you receive to the other account.
4. Spend what’s left on your expenses.
5. Once you have emergency fund, proceed with your retirement fund in the form of stock market investments. Then move on to more investments and possible businesses.

Pay yourself first. From your earnings, make a cut of 20%.

Start taking charge of your financial life today.

Live your life, young mind!

Chris Dao-anis

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Featured image courtesy of thanunkorn / FreeDigitalPhotos.net

PS 1: I like to spark a conversation about money, about personal finance. I call this CASHual Conversations. I invite you to join us at CashualConversations.

PS 2: Like the page and share this to your family and friends. It is easier to change your financial system when the other people around you are doing the same.

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