Financial advise · Saving money

Pay yourself first

It’s the end of the month and everybody is counting down the days until their salary gets credited into their bank account. What many people then do, is pay all of the bills (rent or mortgage, utilities, insurance et cetera), go out for lunch, dinner, shopping and cinema, and then realize there is little left over to save at the end of the following month.

What I do, I have agreed a fixed amount with myself which I want to save on a monthly basis. As soon as my salary gets credited into my bank account I immediately transfer the fixed amount into my savings account. Pay yourself first!

Why you should pay yourself first
It’s important to keep enough savings at hand for an emergency. In case times get tough or you need to replace your washing machine, car et cetera. Setting cash aside, seems to be hard for a lot of people for various reasons. Here are some stats:
– Dutch research shows that about 20% of the respondents don’t have savings. The ones that manage to save, a third of them has less than € 2.500 on their savings account (with the current exchange rate this is about AED 10,000).
– About a third of the respondents acknowledged not having enough savings to replace the two most expensive assets.
– On the other side of the ocean, about half of the Americans report that they could not come up with $ 400 if needed without borrowing from a friend, take out a loan or increase their credit card debt.

Everybody needs a financial buffer to cope with unforeseen emergencies. Therefore strive to save 10 to 20% of your income.
Ok, well that’s quite a statement. I know this is not achievable by everyone, but at least try to set a target for a fixed amount you can set aside every month. How?

Create a flexible and realistic spending and savings plan
Dutch research shows that almost half of the people has never budgeted. Personally I think the word ‘budget’ doesn’t imply something positive and sounds like it’s ‘fixed’. A lot of people face difficulties living by their budget, because it’s too strict and doesn’t leave room for any flexibility. Therefore I would opt for a ‘spending plan’. Let’s give the beast a different name.

A spending plan accounts for your income and expenditures, but also shows the expected big expenditures throughout the year. A spending plan is a good way to anticipate on these big expenditures and to prevent unpleasant financial surprises. We all know when our car needs to go for service, for the yearly registration, when we need to extend our insurances, when school fees need to be paid et cetera. Of course some expenditures are unexpected, but a lot of expenditures you can plan for well in advance.

Step 1: Monitor your spending for three months
For three months, keep track of every single euro, dollar, dirham you are spending. Even the smallest amounts spend on take away coffee. Divide it into categories in an excel-file: groceries, food and drink on the go, sports, clothing, entertainment, children’s school expenses et cetera. Update it every day, otherwise you will forget after a few days where you have spent your money on if you haven’t kept the receipts.

Step 2: Confront your spending and rethink your expenses
After three months you will have a good sense of your spending habits. You have tracked the daily expenses and divided it into categories. Now when you look at it, think: what day-to-day spending is necessary? What is luxury and is nice to get you through the day, but is also avoidable? What can you live without or spend lesser money on? (I know the last one is tough, because you have been spending money on it and it has become a habit). Decide how much money you want to spend on each category.

Step 3: Create a plan
Now that you have tracked your daily expenses for three months and have decided how much money you want to spend in each category, you can create a plan for yourself / family. A realistic spending plan accounts for how much you earn and how much you wish to spend. It also leaves room for flexibility. For example: if car maintenance expenses are lower than expected, you can compensate the higher amount for entertainment expenses that particular month. You have to leave some room for the fun stuff. A strictly fixed budget never works, just like a strict diet never works.

After you have written down your monthly income, expenditures and expected large expenditures throughout the year (for which you can save on a monthly basis), you can calculate how much is left for saving.

Saving prevents borrowing. If you don’t have a financial buffer, you have a bigger chance of being in debt or not being able to pay for your expenses.
Please note that a personal credit on your current account is also borrowing money, for which you usually pay one of the highest interest rates. If you use your personal credit structurally, that means that you are structurally spending too much money.

My tips for you:
– Spend after saving, don’t save after spending! This way you create a financial buffer in order to cope with sudden financial changes. Start with a small amount and try to increase this on a regular basis.
– Create a spending plan for the monthly and yearly income and expenditures and pay yourself first the moment your salary gets credited into your bank account. If you don’t trust yourself doing that or you don’t feel like managing this yourself, you can arrange with your bank that they transfer automatically a fixed amount from your current account to your savings account as soon as your salary comes in.
– If your financial administration is not your favorite hobby in the world, then arrange to have your monthly bills automatically being deducted from your current account.

Waarom onverstandig geen financiele buffer hebben;
Helaine Ollen and Harold Pollack (2016). The Index Card – Why Personal Finance Doesn’t Have To be Complicated;
Federal Reserve 2015 Report Economic Well Being US Households;

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