Sunday, January 10, 2010

Paying yourself first

Paying yourself first is a strategy to save money in an automatic way to make saving a simple habit. Your savings become a ‘ bill’ requiring an automated payment.

For some years now I have followed Janine Bolon’s principles of saving money this way and indeed have seen our savings grow ( despite having 3 teenage sons). As a business at the end of January we have to file our tax return which gives me a rough indication of the amount of profit the business has made and I use that as a ballpark figure to calculate the amount to automatically save into business savings account. Janine’s formula talks about 10% to charity, 10% tithe to church, 10% short term savings and 10% into long term savings. As a business we do not directly give to charity but we do use a percentage of funds to raise money for local causes and successfully held a raffle in November for the Dorset and Somerset Air Ambulance raising a total of £ 270. I therefore set aside 5% of profit for charity and community projects, 15% into short term savings( emergency fund) and 20% into long term savings ( pension contributions).

Once decided on the amount they are set up as regular payments into the different savings vehicles and adjusted only at the end of the 12 month period.

What happens if you fall short?

If there is not sufficient money left at the end of the month then there is something wrong. To cover the shortfall it would be easy to dip into savings but that defeats the plan, so the only way to cover the shortfall is to either earn more ( i.e. work harder) and at the same time cut down expenses.

Paying yourself first is a great way to start the habit of saving and once it happens automatically, the rest will follow.

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