Thread by @money_theory

Concept of 'Pay yourself first':

Today I will talk about this simple yet powerful concept and how you can implement this in your life. Grab a cup of coffee and let's get started.

Ok, so I assume you are not Bill Gates or Mark Zuckerberg who have created path-breaking products that generate income forever.

I assume you as a normal employee who works for money, gets a paycheck monthly, pay your bills, spend money on life pleasures here and there, and finally save money for future purpose.

The issue with this approach is you may be left with little or no money to save.

And this is where the concept of 'pay yourself first' comes in. This is a statement first coined by George in his book 'The Richest Man in Babylon'

'Pay yourself first' is an investor mentality where you automatically route a specified savings contribution from each paycheck at the time of receipt.

This is a diagram from the book rich dad poor dad that explains it nicely. Take a moment to observe the direction of cash flow.

It works this way: You make income ➡️ You save, invest ➡️ Then you pay taxes, rent, etc.,

One notable point here is 'Pay yourself first' means not only to save first but also to channel your savings into investment accounts or else inflation erodes everything.

Having said that, there are two ways you can practice this

1. The rich dad way
2. The normal way

1. The rich dad way

This way is pretty hard for most of us to practice.

Here you 'pay yourself first' every single time even when your cash flow is low and not sufficient to pay bills for the rest of the month.

Your landlord is ready to throw you off the house, Your taxman is ready to fine you, Your creditors are ready to sue you if you don't pay bills on time.

However, this is the motivation for you to work on some new ideas and create more money.

The normal way (without a plan):

Here, you don't want to pay yourself whatever the amount you want every single time and spend the rest of your life in jail.

So, you take the time to calculate

Your monthly income

Your monthly expenses

To arrive at how much amount you can pay yourself

For instance, say your monthly income is Rs 10,000, monthly expenses are Rs 8,000 bringing net cash to Rs 2,000.

So this is the max amount you can pay yourself. You can pay all of it or a portion of it every month.

The normal way (With a plan)

Say after watching personal finance videos all day, your IQ rose a little bit. You have a financial plan now.

You calculate the amount needed for your future goal and then start saving required amount monthly.

For instance, say you want to buy a car which costs Rs 4,80,000 after 5 years. You save and invest Rs 8000 per month to fund your goal.

(Ignored Inflation & returns for the sake of simplicity. Try some goal calculator online to find out the monthly amount required to save)

Bonus word:

Simply 'pay yourself first' a % of your income (say 10%-20%) initially even if you don't have any financial plans. Believe me, your future self will thank you for doing this.

Some tips:

•Reduce your expenses

•Do not touch your savings

•Create alternative incomes

•Maintain separate bank account

•Automate the savings/investments

•Do not get into large debt positions

Benefits:

•You are prepared financially

•You are making you as a priority

•You are creating good savings habits

Long story short, Get SIP notifications instead of EMI notifications at the beginning of the month.

To conclude, let's recollect what the investing legend Warren Buffet has to say about this.

That's it, folks. Hope you enjoyed reading. Like and retweet if you find the thread value-added. Have a great day.