One of the key principles of personal financial planning and wealth creation is to live within your means. This does not mean “going without” – it simply means to only buy what you can afford to buy.
Pay Yourself First
“Pay Yourself First” is a principle of wealth creation which I first came across in the fantastic book on wealth creation “The Richest Man in Babylon” by George S. Clayson and is a principle which has been repeated so many times through the ages.
Simply put, every time you receive any income, take a portion off the top BEFORE you spend any of the money on anything else and save it or do something constructive with it.
The book talks about taking 10%, but I feel in reality you should start small, say 5%, and allow your lifestyle to adjust to your new level of disposable income before increasing the amount you save. If done in small increments, the amounts you save each month will not feel as “painful” – you are less likely to miss another £10 per month taken from your income, than you are £100.
For example, if you earn £30,000 per annum, in the UK today you are taking home £1,800 per month after tax and national insurance contributions. 5% of this would amount to £90 per month. If you invested this £90 per month, and achieved a return of say 4% per annum, after tax and all charges, which would be conservative, then after 5 years you would have amassed £5,966.
Now let’s be honest, this £90 is not money which would have been spent on necessities but is money which would most likely would have been “wasted” on non-essentials. Here are some of what I consider to be the worst value items which people genuinely purchase on a regular basis:-
- Per-packed sandwiches
- Bottled water
- TV listing guides
- Gym memberships (and then stop attending after a few months!)
I am sure if you analyse your own expenditure you will identify those areas in which you “waste” money.
Repaying Debts – a form of “saving”
Alternatively, if you are currently carrying any debts, such as credit or store cards, consider redirecting this waster money into repaying those debts. With credit cards charging considerably high interest rates, by repaying these first you will be earning a far better return on your money.
For your Consideration!
Buy and read the book “Richest Man in Babylon” – it is an excellent read and is not an expensive purchase.
It is a worthwhile exercise to analyse your income and expenditure to see exactly where the money comes from and goes to each month.
Consider setting up a standing order from your current account into a savings account – many banks these days offer online “electronic savings” accounts, which pay a higher level of interest than your current account – simply set up a regular payment to take some money from your current account and place it in your savings account each and every month.
The other benefit of these types of account are that you don’t need to visit the branch – saving both time and money.
The best time for this payment to be made is just after payday!!!
We would appreciate your comments and experiences on this topic – feel free to comment below.