Always Pay Yourself First

There is a single, guaranteed way to improve your financial position.  It could make you wealthy - even rich - some day.  How?  By always paying yourself first. 

It's simple once you get the hang of it, and along with the magic of compound interest, is one of the most important financial lessons you will ever learn.   

So how does it work? 

Well, instead of paying the landlord or the mortgage lender the moment your paycheque arrives in your account, you pay yourself first.  You don't pay for groceries or car insurance, the ESB or mobile phone bills before you pay yourself.  You certainly don't pay the café owner that small fortune for a double latte and muffin first; you pay yourself instead.  Ideally, you even pay yourself before you pay the tax-man.

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By paying yourself first, that is, by earmarking a portion of your weekly or monthly wage to a savings or investment account, you do a number of things:  first you reward yourself and not others for all the hard work that is involved in earning that wage. Next, you get into the savings habit.  And if the designated sum is deducted directly from your salary, or via a standing order, within a short time you won't even notice the deduction. 

That's when the most amazing thing of all happens:  your lifestyle quickly adjusts to the lower cash balance.  (Just ask anyone with an SSIA if they really missed their contribution after a month or two.) You will still end up paying the bank manager and grocer, the ESB and café owner, and probably the travel agent as well, but now you also have a pile of money steadily building up in a savings or investment fund that has a life of its own.

The figures don't lie, either. 

If you start saving 10% of your income from the moment you start working, and you earn, say, a starting salary of €25,000, assuming that wage goes up by a modest 3% per annum and you earn a steady 6% growth per annum, the 'pay yourself first' fund will be worth nearly €16,000 gross after just five years.   The magic of compound interest is still at work and after 10 years there will be nearly €40,000 in your fund; leave it for another ten years and 10% salary contribution will be worth nearly €124,000 on total contributions of just over €67,000.  After 30 years, you may even be able to afford that dream to retire early:  your 'pay yourself first' fund will be worth nearly €293,000.

I mentioned earlier that you can even beat the tax-man by paying yourself first, and you do it by saving in a tax-efficient pension fund.  For every €100 you contribute to your pension, (age-related limits permitting) the Revenue will allow you to claim either €20 or €42 worth of tax relief, depending on which rate of tax you pay.  They'll even let you claim relief for your PRSI contributions and the health levy, which will brings your deduction up to €26 and €48 respectively for every €100 contributions. This tax savings, and the fact that active pension funds are exempt any internal taxation, means that pension funds enjoy the most benign investment conditions.

Once established, a saving habit should last a lifetime.  It's the first step - earmarking that 10% of salary to a good yielding account - that will be hardest part of the exercise.

WHY IT PAYS, TO PAY YOURSELF FIRST…

• You reward yourself, and not just strangers, with your hard earned wages.
• Your lifestyle automatically adjusts to the remaining available cashflow.
• You benefit from the miracle of time on money … also known as compound growth.
• You can achieve important milestones  - like home ownership and early retirement - with confidence and without disproportionately high costs.
• It helps you to build a solid credit reputation.
• Good, regular savers rarely fall into serious debt.
• You can create a cash cushion against serious unexpected events, like illness and job loss.
• It can be very tax efficient if savings are channelled into a pension fund.
• Your accumulated fund can be the launching pad to financial independence if used to set up a business or to invest in real, income-generating assets.
• It helps you achieve an elusive goals in our consumerist age - peace of mind.

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