The concept of pay yourself first has tremendous powers of making one financially independent.
“Pay yourself first” was a phrase which was first used in a book called The Richest Man in Babylon.
But this simple statement has been converted into a profound personal finance rule by Robert Kiyosaki.
Kiyosaki has written a book called Rich Dad Poor Dad where he has explained the need and utility of paying self first.
While I was first reading this book, I could feel that this concept is going to change my life forever. Ever since then, ‘pay yourself first’ concept has got embedded in my thoughts.
What makes pay yourself first so unique is its originality and simplicity. It means what it reads. Pay yourself first before spending a dime anywhere else. Its as simple as this.
To top it all, the benefits of following this simple money management principle is so huge that it almost feels like a gift of god.
If you think that I am overemphasising its effectiveness, stay glued to this article. We will see how to best implement this strategy.
If you are still not convinced, allow me tell you this…
Getting rich is anyhow difficult, right? So why not give this theory a try. If you succeeds its a gain, if not, you will still learn something new (deeper meaning of money management).
Having said that, I am yet to come across a person who has implement the pay yourself first concept in life and have not benefitted from it.
Yes, I am so confident about it.
I follow this concept (in a slightly edited form). I know it works. You can also follow this simple rule for a year and see its benefits.
Do not worry, there is no hoax. Nobody will try and ask money to show you its benefits. Its only between you-and-you.
As Kiyosaki says, following pay yourself first rule is more a matter of self-discipline than anything else.
What you will be asked to do is only not to spend money as it comes. It also talks about how to utilize the “not spent money”.
Robert Kiyosaki has beautifully explained this concept in a very innovative way. In Chapter 9 of Rich Dad Poor Dad, he has made the reference of it like this…
I greatly admire Kiyosaki for this one concept alone. Allow me to share my version of “pay yourself first” rule with you.
Unedited version of Pay yourself first
The unedited version of pay yourself first rule of Robert Kiyosaki is TOUGH. Why?
It is tough because we cannot imagine in wildest of our dreams to handle our income and expenses like this.
The rule is tough to follow more because of our psychological limitation. Our mind is not mapped to handle money like this.
Why I say psychological limitation is because, what we have done till today is to accumulate more and more liabilities. We have planned to perfection, how to spend each and every penny to accumulate dead things or liabilities.
Yes, we only plan to spend. We are natural spenders of money. Hence our natural money management instincts are weak.
But what kiyosaki is asking us to do is exactly the opposite. Do not spend. Do not pay your bills, fees, mortgage, dinning etc.
He is asking you to “pay yourself first”.
But the difficulty here is, it is impossible for us to understand, how to survive the next month if we do not pay for our expenses.
I will quote here what Robert Kiyosaki has said in the book:
Take a break. Stop reading, go out and take a walk. Try talking to yourself, if it is possible for you to preach what Kiyosaki did for himself.
If the answer comes YES, you are already a winner. You no longer need this article as a guide. But if the answer is NO, come back and read further.
When I did this exercise with myself, my answer was NO. But my drive to become financially independent was so strong that even this realisation that, I cannot pay myself first, did not made me demotivated.
I found a compromise, and the best thing is, it works for me.
But before knowing how I have customised the “pay yourself first” rule for self, it important to know one very essential thing…
What to do after one has paid oneself first?
#1 Step: Let your salary become YOUR income (pay yourself first).
#2 Step: Your income is used to grow your asset column (investment portfolio).
#3 Step: The Asset comprising of savings, stocks, real estate generates passive income.
#4 Step: The passive income is used to pay all expenses (standard of living).
This is what Robert Kiyosaki intends to do with the retained income.
Let me elaborate more here the power of “pay yourself first” concept.
For a moment lets assume that our expense is zero (you are staying with your parents and doing a job).
Every month your job earns you a salary. The income from salary you use to build your investment portfolio. You are buying only monthly income generating options. These monthly generating options generates passive income for you.
Every month your investment portfolio is getting bigger, which means every month the passive income grows.
Lets take a typical example of a Person called RAJ:
- Current Salary: Rs.50,000/month. Average salary increment for next 11 years: 8% p.a.
- Yield of monthly income generating investment for next 11 years: 6.5%
Here RAJ is investing his 100% salary to buy income generating asset. See how his passive grows from year 1 to year 11th.
- 1set year – Passive income is 6% of salary income.
- 2nd year – Passive income is 12% of salary income.
- 3rd year – Passive income is 18% of salary income.
- 4th year – Passive income is 23% of salary income.
- 5th year – Passive income is 28% of salary income.
- 6th year – Passive income is 32% of salary income.
- 11th year – Passive income is 50% of salary income.
You must also note that by the end of 11th year, Raj is not only making substantial passive income but he also has an asset worth one crore by the end of the 11th year.
How many people in this world can claim to have an asset worth Rs.1 crore only at 11th year in job?
There is not doubt that in the initial years, Raj must have faced hardship. But today he is a crorepati.
How you can pay yourself first: Practically
When I first read Rich Dad Poor Dad, I already had a family. I was living in a city which was new, and away from my parents.
No way I could have afforded to divert 100% of my salary towards investment.
But one thing was sure, I wanted to preach and practice this powerful concept.
So what I followed was another few logical steps. Though it was an aberration to what Kiyosaki said about paying oneself first, but today I am happy that at least I started.
So from my personal experience, allow me to explain you how a common man can start paying self first.
First budget all your expenses
It is essential for us to first budget all expenses before deciding to pay oneself first.
One must budget what minimum can be spent on groceries, vegetables, entertainment, utility bills, investment etc.
In the same way, one must budget how much one can pay oneself, even before committing any expenses.
Important is to START paying oneself first. This budgeted amount, come whatever may must be paid to self.
To understand the effectiveness of paying oneself first, one must keep doing it for 12 months in a row.
But it is important to finalize a right value. The value can neither be too big not too convenient.
Hence it is important to budget. Stop all needless spendings. Keep only most essential (unavoidable) expense on the list. Remove everything else.
How to calculate your budget?
This free-money can be budgeted and tagged as “PAY YOURSELF FIRST” money.
Transfer this budgeted savings to another bank account in the first hour of salary getting credited in your account.
Make sure to use the PAY YOURSELF MONEY to buy income generating assets.
Let me give you my rule of thumb.
Suppose Raj earns Rs.50,000 per month. His total expense is Rs.47,500 per month. It means, the saving is Rs.2,500 each month.
Multiply the savings value by the magic number three (3). The value here will be Rs 7,500 (3 x 2,500).
Raj can start paying self Rs 7,500 each month.
It is also evident that if Raj starts to pay-self Rs 7,500 per month, some expense will be compromised. The compromise is imminent. No pain no gain.
It is a fact that we generally overspend. If one digs deeply into ones budget, making a provision for extra savings is not difficult.
If suppose Raj cannot compromise his expenses, what choice he has? Raj can think about ways of generating alternative source of income.
This is a harder way forward. But if one can shown this Guts, its worth taking a call.
Final words on Paying self first…
Yes, in initial days it will pose some difficulty. We are not used to not-spending money.
Not able to spend money is a difficult task for many. Not-spending becomes even more difficult when one has idle money (paid to self) in hand. Hence it is compulsory to lock the money (by investing).
Some might even ask that, if we are not allowed to spend then why we are earning money in first place?
The question is valid, but difference of opinion is in, why we are earning?.
We are earning not to spend, but to become financially independent.
But this does not mean that one starts to lead the life of a pauper. This is one reason why it is essential to spend day-after-day on preparing ones budget.
Do not allow yourself to make ready a budget in hours. Work on it for at least a week. Even when you are sure that your budget is well prepared, review it at the end of each month.
Every time you will review your budget, you will see that there will be some change in the value of “pay yourself first” money.
Robert Kiyosaki has concluded it very nicely in his book:
According to Robert Kiyosaki, the right way of doing it is as below:
Do not fall into the trap of large debts. These debts cost us in form of EMIs.
Keep your expenses always in check. You can spend on many things. But never overspend on anything. Always remain in your budget.
Never forget to build assets. Let asset building be as a necessary thing as eating food.
Let your assets generate passive income for you. Set a target to reach a stage where your passive income is 50% of your income from job.
Continue paying yourself first with a strong conviction that this is the fastest and most assured way to achieve financial independence.