Applying Pay Yourself First in Budgeting
Paying yourself first looks straightforward logic wise, but it may be difficult for most people to comprehend and practice. It took me years to get the hang of it, though I understood it mentally. To illustrate a practical application of this principle, I am going to use an example to illustrate.
Imagine, for the purpose of this illustration:
1) Your gross monthly salary is N150k
2) Your tax and payroll deductions is 20% (N30k)
3) Tithes/giving etc is 10% (N15k)
4) You want to save 10% (N15k)
How does this translate to your everyday living?
These percentages are all based on your gross income (N150k).
Your net income, what you get to see becomes N150k less 20% which equals N120K. Your planned tithing/giving and savings come to N30K, which means you are left with N90k.
Your real net income is N90k, if you are financially literate. This is what should stay in your account.
Let’s look at the items one by one.
Item 2: Taxes and payroll deductions. You do not get to see this item. You cannot plan your budget with this item inclusive. It is not yours. It belongs to the government. This is easy to understand.
Item 3: Tithes/giving. I do not need to dwell much on this. If you have made up your mind to give, then it is not yours. Then send it on its way. There is no compulsion in this issue, but a matter of choosing to do it or not. The benefits of giving cannot be over emphasized, especially in the area of creating an abundance mindset.
Item 4: This is where we usually lose the plot. This is where the core of the matter is. if you have decided to save 10% of your salary every month, take it out from the top (where the others belong) and send it where it is going to work for you. Your savings should not spend the night in your salary account. Remove it from the line of fire, the fire being your long spending arms. If it lingers, it will get spent without being replaced.
The key shift we need to make in our mindset, still looking at this example, is to regard N90k as our net income (not N120k). The other 40% does not exist. Don’t even think about it when it comes to spending or assisting a needy friend or relative. Send it where you cannot reach it. That is your ticket to financial independence. If you violate this principle, you will remain trapped in the rat race.
Usiere Uko is a writer and bestselling author of Practical Steps to Financial Freedom and Independence, Available on Amazon.
He also writes for Punch AM Business, Leadership & Lifestyle and Today’s Lifeline magazines.