Pay yourself first

You’ve all heard of this tip. Experts say the surefire way to get rich is to pay yourself first. Normally, people save money after budgeting for the usual monthly expenses. Paying yourself first means you sock away a certain amount before you pay your bills, your groceries, your haircut and manicure.

I can tick off a lot of big names in personal finance – David Bach, Robert Kiyosaki, Suzie Orman. They all say paying yourself first will get you out of the rat race. More than all the scurrying for higher interest earnings and hot stock picking, this one “secret” tip makes a millionaire.

Well, not quite. When MoneySmarts put that tip to the test, the figures showed that behind the simplicity of the plan are several conditions that need to be followed to make this work.

First, pay yourself and forget about that money or else you’re going to dip into it like a jar full of … ok krispy crèmes. MoneySmarts discovered that some people who tried to follow this tip ended up tipping the jar by the end of the month. It’s important to understand that this money should be untouchable. It’s a good idea to make “the payment” part as painless as possible by automating your savings (talk to your banker) so that you never see a single peso. Try to set up two bank accounts – one for your expenses and one for long-term savings. And make sure you don’t stick your hand into the wrong account.

Second, the tip is not going to work without the discipline to mentally give yourself a slap on the wrist whenever you think of getting “a lil bit” of that money for an extra night out, a pair of shoes “that you deserve naman”.

Resist that urge and be ready to make the sacrifice if the budget is getting thin before the next payday arrives. You might feel a little bit deprived, though (and that always makes all of us vulnerable to some impulsive shopping when the money does come in) so keep in mind that you HAVE spent for yourself and wisely at that because what you “bought” for yourself is going to grow even bigger rather than depreciate. Do it, even if it means taking a jeepney ride or foregoing a movie date and buying toys for the kids during the usual weekend mall stroll. (Better yet, forego malling and go to a park.)

Third is the choice of your savings vehicle. Merely squirreling away 10% (or whatever amount you have decided on) will not really cut it. Your savings vehicle should maximize the power of compounding or else you’ll lose money to inflation. Puhleese, don’t put this money in time deposit or savings deposit. That’s a losing proposition.

Angie Llanes-Vilvar, RFP, was kind enough to do our computation for us. A 30-something professional who started working in 1995 might have began with a humble P5,000 per month salary and lets say gets P50,000 now. Along the way, she regularly paid herself first. Actual amount saved as of 2007: P463,200 in a span of 12 years.

However, if she merely deposited this in a savings account that paid 1% interest, she will have only P485,182.92.

Placed in a time deposit with let’s say 3% interest, her little kitty will give her P533,813.33.

Now, imagine if she was a little bit more open to the idea of entrusting her money to a fund manager of a mutual bond fund, her money will grow to P689,259.01 at 8% yield per annum. After all, this is long-term savings, right?

What if she was a bit adventurous and placed this money in a variable equity fund that fortunately earned 15%, she will have P1,027,882.86 by this year.

“Hmm.. good figure,” Angie says.

Yup, good figure. Well, its definitely not guaranteed returns and we don’t know if this is going to be replicated in the following years, but our friend here says after all, her money is in it for the long-term. I can hear her saying, “Let’s just see what happens.”

Now, one last note. Regularly saving money and paying interest on credit at the same time is like trying to transfer water to a bucket using a container with a big hole. Credit card balances should be paid first because that’s already saving money from interest.

There are too many things that we buy and don’t really need after all. Check out this new washing machine. Mitsubishi Electric says this is the world’s first moving washing-drum washer-dryer. Its a drum that can slant angle between 0 and 20-degrees for washing, spin drying and hot air drying. Mitsubishi claims the new washing machine can save washing and drying times, electric expenses. Total price: $2,100.

Source: AFP

Disgusting. These guys will try to sell you anything!

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