Women should plan to be rich rather than poor. It often takes little more effort or sacrifice to end up financially free than it does to finish with nothing and living day to day.
Most women deal with their income by spending first and hoping to save some of whatever is left. We pay the bills, as we must, for mortgage/rent, power, and telephone. We have to spend on groceries, petrol/transport and clothing. These costs are unavoidable. We also treat ourselves – movies, drinks, hobbies and holidays. Leisure and entertainment are discretionary costs but everybody wants some fun in life. Usually, despite our best intentions for saving, there is nothing left over. In fact, there is usually a lot of month left at the end of the money rather than the other way around!
Savings are a payment to yourself – an investment in your future. They pay for the future that you want to have, giving you lifelong independence and choices. And savings are far too important to be dealt with last. If we spend first and save later there is usually nothing left to save. The solution is to pay yourself first.
Smart women decide on a percentage of income or a dollar amount that they will save each pay period. This might be 5% or 10% of after tax income each month. Or it might be $50 or $100 each week. Circumstances will vary – younger women in first jobs may only be able to save a small amount while many women who are well established in their careers can save a big percentage or thousands of dollars per pay period.
Paying yourself first is a very smart move. It’s not what we spend but what we keep that really matters. When you choose to spend first and save later, spending usually takes all of the money. When you choose to save some first it does not matter how you spend the rest, as your savings are secure.
Paying yourself first only takes one decision. Many women agonise over each spending choice when trying to make the money stretch and have some left over. When you make the decision to save first you don’t have to worry about squeezing out a surplus at the end of each pay period. You took that money out at the beginning.
Paying yourself first should be automatic. Smart women set up an automatic payment to another account. As soon as your pay arrives in your account the savings amount you have chosen will be swept off into your savings account. You won’t ever handle it and so won’t be tempted to spend it. Once you have set up the automatic payment this will happen each pay period and you don’t have to make a new decision to save each pay period.
Think of paying yourself first as working for yourself: If you work a forty hour week saving 2 ½ % means that you worked an hour for yourself, saving 10% that you worked a half day for yourself, saving 20% that you kept the income from a day’s work for yourself. Choose to keep something for you out of your earnings. Otherwise no matter how hard you work or how much you earn the end result is the same – there is nothing left.
The amount you pay yourself should not be arbitrary. You should calculate carefully how much you can afford to save each pay period and decide to save as high a percentage (or dollar amount) as you can. You will need to look at your spending and your budget in order to determine how much you can put on automatic saving each pay period. You should keep monitoring this amount. As you receive pay increases you should increase your savings payment – after all, you were managing to live on the lower salary so won’t miss the extra that is now going to savings. This is a very painless (and smart) way of becoming a great saver. Otherwise you will simply raise your standard of living with each pay rise and spend the lot, no matter how much you earn.
Perhaps you feel that you cannot possibly save anything at all? Then look for a single habit you can change that will create a surplus each pay period. That might be coffee (two cups a day five days a week - $30), magazines ($20), bought lunches ($5 each day - $25), flowers, drinks after work…If you can commit to changing one or more of these spending habits, you can create quite a surplus of money for saving. Many of these spending habits consume a great deal of cash that we hardly notice – very small amounts but spent daily. Think of this money as ‘low hanging fruit’ – money that you can easily gather without too much pain.
Paying yourself first is the single best decision you could make for your finances and your future security.
jbaker@wealthcoaches.net Author of “Smart Women, Smart Money”, Allen and Unwin 2004
The views or information given in this article are not necessarily the views of AMP or AMP Adviser Businesses. It provides general financial information and is not intended to provide financial advice. For personalised financial advice, we recommend you contact us.