Money talk can get quite intense sometimes. And we totally get that. But since this is a delicate topic around youngsters. This article is aimed at empowering you by providing guidance on budgeting and paying yourself.
It is clear that you cannot create a healthy financial life unless you have more income than your expenses. There is a need to understand and set goals for your income and expenses. This is what we call the process of building a budget.
An effective budget requires you to prioritize what you spend your money on and which expenses are necessary and which are luxuries. Now, when we say to pay yourself first, doesn't mean going to your bank, withdrawing money and paying yourself! No!!
Financial planners say that you should start within a budget by paying yourself first. This simply means setting aside money for saving before you pay the bills and buy things for yourself. This encourages you to build good financial habits and to be in a position to take advantage of opportunities that may arise.
Definition of Pay Yourself First
Also known as reverse budgeting, Pay Yourself First is a saving strategy that recommends that individuals should save a portion of their earnings/income/paycheck before spending any other money on bills, groceries, or any other discretionary items.
Advantages of Pay Yourself First
Building the amount you have saved over time which forces you to live within or below your means
Achieving your savings goals faster
Growing your money if you are saving in a compound interest-earning account
Savings on taxes where KRA gives you relief (We will discuss this on the next blog)
Disadvantages of Pay Yourself First
If you have not yet read/or become trained on money management, you may end up underbudgeting hence, left scraping to make ends meet
Accruing more debt - since interest compounds over time,
How to Pay Yourself First
Now that you know what it means to pay yourself first, and have had a moment to consider the potential benefits and drawbacks, let’s take a look at how this strategy actually plays out, step by step.
Evaluate your monthly income + expenses: Before you decide on the amount you want to save each month, take a look at both your fixed (those costs that stay consistent month over month, like your rent) and variable expenses (aren’t always the same amount each time, and sometimes you don’t incur them at all. Entertainment costs, vehicle maintenance.
Identify your savings goals + commit: If you’re not sure where to start, consider the 50/30/20 rule; 50% of your budget should go toward essential expenses, 30% should be reserved for wants and lifestyle expenses, 20% should be funneled into your savings and any extra debt payments
Review + reevaluate: it’s important to remember that your budget should never be static. As life changes, your finances follow
Finally.....
The pay-yourself-first budgeting style can be a good way to boost the balance in your savings account or learn how to budget. As you budget, you should reflect on your unique financial situation to assess whether this strategy suits you. In most circumstances, it would be in your best interest to pay down debt before you start making monthly contributions to your savings.