Why should you pay yourself first?

The concept of paying yourself first is essential to building wealth and thus achieving financial freedom. That’s what we focused on in the first part.

But that’s not enough, because if your cash flow is negative (you’re consistently in debt), the day will come when you’ll have to dip into that money (your investments) and that means simply destroying everything you’re building.

So controlling your cash flow is an essential skill and integral to the concept of paying yourself first. In fact, if you can do this, you may even be able to expand the amount you spend on building your future. The more the merrier (though like everything in life, balance is very important).

I must say that it took me personally a lot of work (even years) to learn the art of controlling my cash flow. The concepts are simple, but the application is not.

I remember having complicated spreadsheets, buying personal finance management programs that weren’t available in Mexico, and even with all those tools I couldn’t “fit” the budget.

Until I found a methodology that changed everything and taught me that reality is never what you plan it to be.

There are always things you haven’t considered (for example, the electricity bill is more expensive than you thought, or the children’s school uniform pants no longer fit).

This means that adjustments will always need to be made if the budget is to work. This capacity and ability to do it well is the key to not losing control.

That’s why, in my opinion, classic budget advice and methodologies don’t work. They are hard to follow and end up causing a lot of frustration. That’s why I said it was the worst advice I’ve ever been given.

To differentiate it, I’ve called the method I’ve always suggested for cash flow management the spending plan. It consists of the following:

Assign work to every peso you earn.

Money is a little rebellious and unless you tell it exactly what to do for you, it will do what it wants. This is why you have to put work into any money you earn as soon as you receive it. Never before you win it and have it in your bag.

This is important because many people end up saying, “I’ll buy it today and pay it off the month I get the bonus.” In other words, they end up spending the money before they receive it, and that causes them to lose control sooner or later. Because other things are always intertwined. Remember: reality will never turn out exactly as you thought.

So every time you receive an income, you need to ask yourself this simple question: What do I need this money to do for me before I get paid again? Obviously, you pay yourself first and allocate the rest to all the other categories until you’re done (all that money).

Don’t forget your irregular expenses.

This is one of the most common reasons why people lose control of their money and end up in debt. Your spending plan should include them.

Think about it: it’s much easier to set aside a little each month for them so that when they do appear, you’ll have the money to pay them off without a problem.

Some goals can be considered the same as irregular expenses. If you like to travel and usually take a few trips a year, allocate money in this category. If you are saving for a trip you want to take to Europe in three years.

Your plan is not set in stone:

you must modify it if necessary. A spending plan is a decision-making tool. If your favorite artist’s concert suddenly goes on sale and you’re dying to go, open your schedule and see what you need to do (which categories you’ll need to cut back on).

Maybe what you set aside for entertainment isn’t enough. Maybe buying plane tickets means you’ll have to use some of the money you had set aside for the trip of your dreams and have to put it off for a few months.

Then you’ll have to ask yourself what’s most important to you and you’ll be able to make informed decisions about spending, but you’ll always be in control of your cash flow.

As you can see, the concept of a spending plan is simple. There is a learning curve when you start out as you challenge many of your preconceptions about money.

Plus, there are always temptations (for example: going into debt and going to that concert with friends). If you stumble: keep going.

You will learn to master it in a short time and that control of your cash flow combined with the ability to pay first will lay the foundation for gradually building the financial freedom you desire.

Leave a Reply

Your email address will not be published. Required fields are marked *