How to Pay Yourself First – The Simple 5 Percent Method

As simple as it sounds, many people find it difficult to pay themselves first.

Instead, they first pay the government, pay their bills, or even pay their employees. In these cases, they are prioritizing every other person or entity other than themselves.

No matter how much you earn, failing to pay yourself first would most likely lead to not paying yourself at all.

Remember that expenses will always rise to meet current income. Hence, it is important to pay yourself first before utilizing income towards expenses.

Why Pay Yourself First

If the income is yours in the first place, why bother to pay yourself first?

Well, paying yourself first helps you hedge against overspending and lack of financial planning.

If you have no financial plan in place, best believe that your expenses will rise to consume your current income.

Well, except you earn an unlimited amount of money, which is not the case for 99 percent of the world’s population.

By paying yourself first, you can create a budget or financial plan for the important goals you want to achieve.

This is very important especially when those goals are long-term goals that require consistent financial commitment.

How Much Should You Pay Yourself First

There are no hard rules to how much you can pay yourself first.

While some can afford to pay themselves more, others work with a tight budget and would have to squeeze something out to even save at all.

The goal is to always pay yourself first no matter what.

Expenses will never completely go away, and most times, we won’t be able to foot every expense on our list.

The 50/30/20 Rule

Most people rely on the 50/30/20 rule when it comes to paying themselves first. 

50 percent for needs, 30 percent for wants, and 20 percent for savings. So, that’ll be paying yourself a 20 percent cut of any income.

In practice, this can be very difficult to consistently follow through over the long term, especially in cases where your needs take up a larger chunk of your income.

The 5 Percent Method

A more realistic approach to paying yourself first would be to use the 5 percent method.

That is, you pay yourself 5 percent of any income before then applying the 50/30/20 rule.

So, the 50/30/20 rule would be applied to 95 percent of your income because you’ve already settled yourself.

This way, your needs, wants, and savings get fulfilled, while you still have a nice 5 percent chunk to plan with in the long term.

How to Pay Yourself First

To get started paying yourself first, it is important to take advantage of available avenues for setting up systems that ensure you get paid first at all times, no matter what.

Here are some ways to go about it.

Self Tax at Source on Every Income

This is the simplest way to pay yourself first.

Simply take out your 5 percent at source on every income you make. 

No excuses. Assume that this is a compulsory tax you have to pay to yourself, else…

So, if you earn $100, it is assumed that your net earning is $95, and your financial plans should hover around that figure.

Save as you spend

If you are not able to pay yourself at source, then you can do that on a spending basis.

Simply apply a spending tax of 5 percent on any expense you make, and put that towards future financial goals.

So, if you make a $100 purchase, you’ll have to pay yourself a cool $5. The more you spend, the more you are able to pay yourself.

Operate a Blocked / Restricted Bank Account

Another simple way to pay yourself first is to let your bank do the job for you.

Simply open a blocked bank account or apply withdrawal restrictions on your bank account.

You can instruct your bank to take out 5 percent of every deposit and put that in a special savings account, or you instruct them to limit withdrawals to 95 percent of deposits.

This way, you’ll have 5 percent of your bank deposit safely locked in for a period of time, until you’re ready to utilize it.

Automated Debit with Fintech Apps

If you have good consistent cash flow or a regular income from a job, then you can utilize automated debits to pay yourself first.

There are many fintech apps that offer this feature, which you can set up to make periodic debits on your debit card or bank account.

This should be quite easy if you already know the amount that is coming into your bank account.

Simply set your auto debit to take out 5 percent of that inflow, and put it towards future savings.

The 5% Cooperative 

Another cool way to pay yourself first is to join a cooperative savings group that requires contributions of up to 5 percent of your monthly income.

This way, you’ll be forced to pay yourself first even when you don’t feel like it.

And this could be beneficial especially with cooperatives that offer a way to earn interest on your savings or investment opportunities that could grow your contributions.

Conclusion

There are many other ways to pay yourself first, and the good news is that you are not restricted to a single one.

In fact, you can combine more than one of the above methods to ensure that you navigate the barriers to paying yourself on a consistent basis.

For example, you could save as you spend, and still enjoy the benefits of joining a 5 percent cooperative.

The goal is to ensure that you are putting money away for those days when you’ll need it, and to have the resources to fulfill future financial goals.


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