• Bill Savellis

The 'Pay Yourself First' Principle

Updated: Mar 29


In my experience, the temptations of a city lifestyle combined with the regularity of a high salary often results in poor money choices.


The security and consistency of our income, more often than not, results in a lack of urgency and a sense of complacency when it comes to planning for our future.


Those who I have worked with and have had significant success, have done so only because they have embraced the philosophy that ‘good things happen to those who set their priorities straight.’


My personal philosophy has, in part, been shaped by George Samuel Clason, who published a book way back in 1926 known as The Richest Man in Babylon, which has since become a classic in financial literature.


Why Pay Yourself First?

One of the most important lessons the book taught was to “Pay Yourself First.” The wealthy man of Babylon discovered the road to wealth, “When I decided that a part of all I earned was mine to keep.”


Every month you vow to increase your retirement contributions (I promise!) or stash away a little more in your emergency fund. Yet somehow one month follows another and your retirement contributions remain where they were, and your emergency fund is still threadbare.


The stumbling block is that by the time you’ve paid for your everyday living expenses from your rent, to your groceries, your utilities, and even the occasional smashed avocado breakfast and dinner out, there often isn’t enough remaining to increase your savings. So, you’re back to waiting for your next month’s salary. Rinse and repeat, the cycle continues.


If this scenario sounds eerily familiar, it means you're not remotely in the habit of paying yourself first. Now, I must point out that “Paying Yourself First” is way different to lavishing cash on yourself.


The “Paying Yourself First” philosophy implies prioritising a savings-led strategy ahead of indiscriminately splashing your hard-earned cash about. Look to allocate a set percentage of your monthly income on the day you are paid before you let loose the hounds of discretionary spending. Most people wait until they’ve bought what they wanted that month and only save what’s left. Now that's paying yourself last!


A Lesson In Accumulating Wealth

One of the underlying, if often ignored lessons in accumulating wealth, is you must remember you cannot accumulate wealth if you don’t save at least a part of what you earn.

The easiest way to achieve that is by prioritising “Paying Yourself First” before you spend any of the money you earned.


The book recommends that we pay ourselves 10 per cent of all that we earn. This means for every $100 dollars you earn, $10 should go to paying the person looking at you in the mirror each morning.


Another way of looking at this “Paying Yourself First” approach is its objective to ensure your future self’s major financial goals are accommodated. This means squirrelling away an emergency fund, saving for a deposit on a home, putting in place an investment strategy and contributing to your superannuation fund.


To summarise, it’s critical to put these financial building blocks in place before you go on a spending spree after your salary hits your bank account each month.


Your Nest Egg Is Your Responsibility

As we all know, fear is a wonderful motivator and you’d think the desperate state of our national savings would suffice to scare most of us into saving smarter.


Yes, no, maybe, probably not!


Regrettably, our salary needs to cover a multitude of calls on our pocket. With our steadily rising cost of living, everyday expenses and flat wages growth, little wonder saving can be a challenge.


However, the sooner you start paying yourself first, the better off you will be. Not only will you be able to harness the power of compound interest sooner rather than later, in helping your money grow faster, but you’ll also position yourself to ensure your financial objectives are being funded before life has a chance to get in the way. Wait too long or the right time to start saving, and a baby, major medical expense or redundancy could throw your financial future into a tailspin.


Rinse And Repeat Your New Pay Yourself Savings Habits

Now I’m the first to admit it can be challenging to adopt a “Pay Yourself First” way of thinking. Sometimes when we have been handling our finances the same way ever since we left school and got our first job it’s hard to break our habits.


The unfortunate truth is that if you took a good look and how you manage your cashflow, you will quickly realise there is no structure or system and your money seems to splash about from one account to another, much like clothes in a washing machine.


However, rather waiting for paying yourself to feel natural, think about placing as much of your new saving strategy as possible on automatic. The key is to automate, schedule and programme.


This can be achieved by setting up a banking structure to support your new philosophy. We call this the Five-Bucket System.


“Paying Yourself First” can require a bit of time to become a habit, mainly because there isn’t the immediate gratification you have with spending it immediately. However, the Five-Bucket System is a simple, automated and systemised approach to implementing the “Paying Yourself First” principle.


Another benefit of the bucket system is how quickly you gain an understanding of, not only where your money goes, but also what costs you could either slim down or eliminate entirely.


A Self-Employed Guide To Paying Yourself First

As any small business owner can attest, there are good months and down months.


Sometimes it’s hard for us to pick where we are in the business cycle. True, it’s a little trickier to save a set amount when you’re not sure how much you’ll actually make from month to month.


So how do you pay yourself first when your income can vary significantly?


OK, try mapping out a budget based on your average month. I try to put away some of my extra money in my good months in a separate savings account, so I have an operating reserve to draw on in slower months or even a down quarter. I can then draw from that operating account to even out my cash flow without disrupting my savings strategy.


Every industry sector and every business has its own cycle. Our natural habit when money is coming in is to spend it. Oops! However, what you should be thinking is, “OK, it’s been a good month. How much do I need to set aside for a bad month?”


This is the business owner’s version of “Paying Yourself First.” It’s a smart strategy commercially and could keep your business out of trouble in the bad times. Think about placing 10 per cent of your monthly revenue in an operating fund.


The Five-Bucket System (Banking Structure)

If you struggle sometimes to juggle your spending and savings priorities, let me share with you my strategy for saving money using the five-bucket system. You won’t believe how simple it is!


This five-bucket system is my system for managing my money. My five buckets consist of a Living Expense Bucket, Debt Bucket, Investment Bucket, Jackpot Bucket and Lifestyle Spending Bucket. You may prefer to allocate your cash differently but the key is to find a system that works for you which reflects your savings goals and lifestyle.



Fixed Expenses Bucket: This is the engine room of your life. In this account you pay your rent, insurances, utilities, phone bills, private health and gym membership …. basically, anything that requires money from you on a regular basis. These are usually the same amount each month, meaning automatic payments can be scheduled.


Debt Bucket: This is the least favourite bucket as you are paying off things you have already purchased. This bucket can either take the form of your mortgage, offset account, or a separate bank account which is used to make repayments.


Investment Bucket: This is not necessarily a bank account but rather an investment such as shares or managed funds. Its objective is to ensure your future self’s major financial objectives are accommodated, such as retirement.


Jackpot Bucket: Doesn’t only pay for big ticket items (such as holidays) but also serves as an emergency account in tough times. It gives you something nice to look forward to each time you put savings in.


Lifestyle Spending Bucket: This is everyone favourite bucket. This is where you get to live a guilt free lifestyle. Use this on anything that makes you happy now.


Managing Your Buckets

I highly recommend you open separate savings accounts for each of these buckets. This way, you can quarantine your savings buckets from your day-to-day living expenses and avoid the temptation to dip into them when your need is great. It acts as a gentle reminder that you have reached your designated allotment for a specific expenses account.


Please note that it purely acts as a reminder to help build positive money habits and is not a constraint on your spending. During irregular or emergency circumstances, retrieving excess funds is as simple as making an internal transfer. However, the question you must ask yourself each time is whether you believe its worthwhile taking money out of a longer-term bucket, and sacrificing the wealth it may grow, for a shorter-term expense. Temptations are everywhere, but it can be refreshing to gain more control over your money and knowing precisely what it is going towards.


Tracking Your Progress

If you don’t understand where your money is currently going each month, it is going to be tricky to pay yourself first.


Check out financial apps like Pocketbook Personal Finance Expense Tracker, MoneyBrilliant, or MoneyPad. They will help you get on top of your expenses and monitor your bucket strategy’s progress on a monthly basis.


Alternatively, If you want a simple & easy way of tracking your cashflow, try our Cashflow Tracker.


The Cashflow Tracker is a simple money management tool that we designed and built to support you to better manage your cashflow and show how you compare to your desired lifestyle budget.

As Warren Buffet is reported to have once said, "Do not save what is left over after spending, but spend what is left over after saving."


A Savvy Approach To Organising Your Bank Accounts

As I’ve discussed, the most effective way to accumulate wealth and avoid debt is to set up a monthly budget and instil some discipline around how we save and how we pay for our living expenses.


All too often people pay their groceries, fuel, dinners out and holidays on my credit card, only to have to dip into savings or investments to make ends meet.


So, if like me you would like to embrace the “Pay Yourself First” philosophy, you should start by downloading our Strategy Planner.


This clever tool will also help you take stock of your expenses and correctly categorise them according to their appropriate bucket. Once you have identified your savings, choose how to allocate your savings. Choose between making additional contributions to super, reducing debt or living a more exotic lifestyle. The choice is yours to make once you've crunched the numbers.



Final Observation

So, that's ultimately the guiding principle behind the “Paying Yourself First” philosophy and the bucket approach. Putting your own long-term financial independence ahead of short-term lifestyle expenses and instant gratification purchases. Remember, you are your own biggest asset. After all, wealthy people pay themselves first and poor people do not.


There’s got to be something in that, right?

Information published on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this document is General Advice and does not take into account any person's particular investment objectives, financial situation and particular needs.


Before making an investment decision based on this advice you should consider, with or without the assistance of a qualified adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. Past performance of financial products is no assurance of future performance.

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