Most people around the world manage their finances in the following manner:
Step 1: Income flows into their account
Step 2: They pay for the mandatory expenses–rent, electricity, phone, internet, EMIs, food etc.
Step 3: They then make the discretionary expenditures–shopping, dining out, leisure activities etc.
Step 4: If there is any money hopefully left over, they save and invest it.
We are going to make one minor but critical tweak to this process. And that will set the foundation of your financial planning journey for the rest of your life. Each month, before spending on anything, you will park away some funds for saving and investing. So the process will be as follows:
Step 1: Income flows into your account
Step 2: Pay yourself first and move a fixed amount out for savings and investments.
Step 3: You then pay the mandatory expenses–rent, electricity, phone, internet, EMIs, food etc.
Step 4: Use whatever is left over for your discretionary expenses–shopping, dining out, leisure activities etc.
This strategy is called “Paying Yourself First” and is considered one of the golden rules of personal finance. We have simply moved Step 4 to Step 2. And are treating “Savings and Investments” as you would any other mandatory expense, no different from rent or your phone bill. So that every month when your income comes in, you first pay yourself which means transferring out a fixed amount to save and invest. And then you pay the other mandatory expenses. And finally, use whatever is left over for your discretionary expenses.
The most obvious advantage of doing this is that you are saving and investing in a disciplined fashion every month.
Money gets invested before you can spend it, and you are leaving nothing to chance. Another benefit is that you have de-prioritised your discretionary expenses and moved them to the bottom of the pyramid. So you are first saving, then paying your rent, utilities and other mandatory bills, and only then spending on the items that are not sheer necessities. This is a far more prudent way to operate.
The best way to operationalise this is through a monthly standing instruction from your bank account to a savings/investment account. Choose the amount you want to save each month and set up the instruction for any convenient date–whether the first of the month, the day your salary gets credited, or any date that makes sense. But each month, money should automatically get debited and invested without your intervention. You need to absolutely foolproof the process.
Generally, one has few sources of income, but when it comes to expenses, one ends up making payments to all and sundry. If you review your credit card statements, UPI transactions, and bank accounts, you are likely making dozens of payments to various corporations, apps, vendors, and service providers. I want you to add one more payee to the list: yourself. And each month, pay yourself first.
Rishi Piparaiya has held senior leadership positions in wealth management, strategy, sales and marketing with leading financial services organisations, including Citi, Aviva and Banco Santander. He achieved financial freedom by age 40 and left his corporate job to pursue his passions. He is now a bestselling author, world traveller and angel investor.
