Why “paying yourself first” could help you to secure the future you want

Creating a financial plan can help you to work towards and achieve your long-term goals.

For example, your financial planner might help you by building a well-diversified investment portfolio or making the most of your pension contributions to ensure you save enough for the future.

However, it’s often the simpler aspects of financial planning, such as budgeting and regular saving, that make the most significant difference in your situation.

By mastering these basic habits, you could gain control over your finances and create a strong foundation. Then, you can begin building wealth and investing for the future.

“Paying yourself first” is a simple yet powerful habit that could make it easier for you to secure the future you want.

Read on to learn more.

“Paying yourself first” means prioritising your savings

Budgeting is the cornerstone of good financial planning – but getting it right can sometimes be a challenge.

For instance, let’s say you have £5,000 to spend each month and your mortgage and bills cost £2,500. You then spend a further £1,000 on essentials such as food or travel costs. This leaves you with £1,500 remaining for discretionary expenses such as eating out, holidays, cultural events, or socialising with friends.

Then, at the end of the month, you might contribute whatever is left to savings. Some months you could have £1,000 left while other months you might have £200, or nothing at all. This is because your expenses might be higher in certain months, or you could face unexpected or one-off discretionary costs.

This approach could make saving difficult for several reasons. First, you may be more likely to spend the money because it’s there in your bank account and you have easy access to the funds.

Second, it can be easy to forget about saving if it’s an afterthought at the end of the month.

The idea of “paying yourself first” could help you to save more by reversing the way you approach your budget, making savings a priority.

To do this, instead of saving whatever you have left at the end of the month, you contribute a regular amount to your savings each month as soon as your income lands in your bank account. In other words, you pay yourself before paying bills, buying essentials, or spending on luxuries.

Using the above example, you could immediately put £1,000 of your £5,000 earnings into savings each month. Then, you spend £2,500 on bills, leaving you with £1,500 for discretionary spending.

You’ve factored the £1,000 into your budget, so you always have enough to contribute to your savings, regardless of what you spend throughout the rest of the month.

And, if you automate the savings, you’ll put money aside each month without even having to think about it!

When creating your budget, it’s important to consider what you can realistically afford to save, and how much you’ll need for discretionary spending. With some minor adjustments over the course of several months, you may be able to find a balance that allows you to save consistently while also funding your desired lifestyle.

2 practical benefits of paying yourself first

Paying yourself first could benefit you in two practical ways.

1. An emergency fund could protect you against financial shocks

Building an emergency fund is important because it protects you against financial shocks. For instance, if you need to make repairs to your home or fix your car, you can use your savings to cover the costs.

Without emergency savings, you may be forced to rely on expensive borrowing to pay for these expenses.

By paying yourself first, you ensure that you’re consistently contributing to savings and building financial resilience. Ultimately, this means that surprise costs are less likely to disrupt your financial plan.

2. You may find it easier to work towards financial goals when you pay yourself first

Consistency is key when saving for medium- to long-term goals. If you have a target, and you save a regular amount each month, you have a good idea of how long it will take to reach a specific savings milestone.

As a result, it may be easier to plan for more immediate expenses such as a holiday or a new car.

Additionally, you can forecast how much you’re setting aside in savings and investments for later life. This makes it easier to determine what kind of lifestyle you’re likely to be able to afford.

In some cases, you might find that you need to increase the amount you’re saving to achieve your ideal lifestyle in retirement. Having clarity over how much you’re saving means you can make these adjustments now. As a result, you may be more likely to save enough to fund your dream retirement.

Conversely, if you save at the end of the month and contribute varying amounts it’s much harder to plan ahead. Also, if you continually set aside a smaller amount at the end of the month, you might find it challenging to build enough wealth to achieve your ambitions.

Fortunately, by adopting the simple habit of paying yourself first, you may find it much easier to build financial resilience and work towards your goals.

Get in touch

If you need some assistance setting a budget, or you’d like to explore how much you should be saving now to meet your future financial goals, we can help.

Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.