Paying yourself first is one of the most fundamental concepts in personal finance. It refers to the process of directing a proportion of your salary into your savings before you take care of your monthly expenses. Without doubt, the easiest way to ensure that you do actually pay yourself first each month is to set up a direct debit where a proportion of your salary is skimmed off into your savings as soon as you’re paid.Â
The easiest way to save
Yet a recent study showed that only a minority of British adults actually do this. Indeed, according to Skipton Building Society, which surveyed over 2,600 Britons on their finances earlier this year, only one in four people in the UK have a direct debit set up to divert a proportion of their salary into their savings. This goes a long way toward explaining why savings rates are so low across the country.
You see, when you don’t pay yourself first, it’s very easy to blow your whole pay packet and have nothing left over at the end of the month. Plenty of people have good intentions when it comes to saving, but if money is sitting in their bank account, it’s all too easy to spend it at the shops, or on a big night out with friends on the weekend.
Of course, setting up a direct debit isn’t always necessary if you’re disciplined with your money. Many people direct funds into their savings manually. But the key, if you’re serious about boosting your savings, is to always pay yourself first. When you receive your salary, first direct a proportion of it to savings, then take care of your expenses and then, finally, spend the rest if you want to.
Another savings mistake
Another fundamental wealth concept is getting your money working for you. Yet Skipton’s research suggests that plenty of people across the UK don’t seem to grasp this concept. Indeed, the building society found that more than one in five Britons actually keep their cash savings in a ‘piggy bank’ at home. This is quite alarming.
If your money is sitting at home in a piggy bank, then it’s not generating interest and it’s certainly not growing faster than inflation. What that means, as I explained here, is that the money is actually losing purchasing power as time goes by. In other words, in five or 10 years, it will buy you fewer goods and services than it would today, simply because prices will have risen over time.
If you’re serious about boosting your retirement savings, it’s absolutely crucial to have your money working for you and growing at a rate above inflation. And the best way to do that is to allocate a proportion of your money to growth assets such as shares, funds and investment trusts. These assets will grow your wealth over the long term and ensure that your money is not eroded by inflation over time.