Last week I talked about, “What is Wealth?” in my MoneyMaestra Wise Wednesdays blog post. As the post explored, wealth is definitely not just about money- it is about so much more. Yet, money, and your relationship with money, is a part of wealth. So, in today’s blog post, let’s explore what paying yourself first means.
In order to grow your money, you must pay yourself. By paying yourself, I don’t mean receiving your monthly income; I mean putting money into your emergency fund, investments, and savings. If you are not growing your money and creating a security net for yourself, you will not become wealthy, in the monetary sense, or become financially free.
One of the many reasons a monthly budget is necessary for financial organization is so you know what you bring in every month and what you pay out- and to whom. Many people don’t allocate a monthly “expense” to themselves and therefore don’t make paying themselves a habit. In my monthly zero-balance budget, I have “expenses” to myself called emergency fund, investment, 529 (the account for my son’s college fund), and at times a special savings expense such as vacation fund. When I work my budget, it includes transferring money into these “expenses.” I have a regular amount that I initially put as my monthly expense in the above-mentioned categories, based on my expected income. If I have additional income in any given month, I will increase these “expenses” to myself because that is how I grow my money and continue to create a wider security net for myself.
You do have to pay your necessary living expenses, such as mortgage or rent, electricity, food, health insurance, car loan, etc. but once you allocate money to pay your necessary living expenses, paying yourself is a priority. (Remember you must also pay your debts such as various loans and credit card bills- there will be future blog posts on managing, reducing, and ridding yourself of debt) Paying yourself comes before paying discretionary expenses, let me explain further…
My necessary living expenses appear at the top of my budget, along with a charitable expense because I allocate giving as a priority in my budget (On a later date, I will do a separate blog post on giving and why I believe giving contributes to overall wealth), and then next in my budget comes paying myself. I want paying myself to come before my discretionary expenses, because if I can’t afford to put money in my emergency and investment account monthly, then I certainly can’t afford that new dress. Basically, I am putting growing my wealth and financial security above my immediate desire for a new dress, that I certainly don’t need, even if I really want it. Once you begin to do this regularly and it becomes a habit, you become much more aware and discerning about what you buy and why you buy it. As you see your emergency fund and investments grow, it becomes very empowering and freeing. If you can afford the dress and you want it- I am not saying don’t buy it or stop shopping all together- I am just saying paying yourself first and working towards financial freedom beats that new dress any day.
Susan, the MoneyMaestra