Marie-Claire AssekoDisclaimer:
The content of the Kaizen Gal website, its podcast and blog posts should not be taken as an investment or financial advice. I am not a financial planner, nor do I pretend or intend to be one. I am solely sharing what works for me, what is specific for me and for the stage of life that I am in.
🡪 Always make sure to do your own research and due diligence before making any investment or financial decision.
The goal of the Rags to Riches series is to share tips and habits I picked up and honed over a seven-year period of time in order to help me manage and automate my personal finances. Financial anxiety is real and scarcity mentality will hinder you from expanding the reach and ROI of your money.
So here is my 5-part story on how I went from being thousands of dollars in debt, expelled from my apartment to buying a 3-bedroom with basement house by myself in 6 years. My rags-to riches story, except I am not that rich…yet ^^
As a believer in Jesus, I am aware that God is the One who makes the impossible possible. My life is a continued demonstration of His undeserved Grace towards me and us all.
This is a summary of the Season 3 – Episode 2 of The Kaizen Gal podcast titled “Pay Yourself First”, the second installment of my series on Personal Finances.
Before diving into this article, make sure you read the first of the series, titled “Pay Down And Manage Debt”, and plan how to implement or at least understand what I suggested there.
What Does it Mean to “Pay Yourself First”?
To pay yourself first means to invest in the financial stability of your future self. Typically this involves allocating money to your retirement fund and investing some one way or another (stock market, bonds, etc.)
Paying yourself first sounds pretty simple in principle right? Yet sometimes it can take effort to do it in practice. Indeed, whether you’re just getting started with your budget or you’ve been following a strict one for some time, it can be easy to forget to set some money aside before you pay everything else (bills, groceries, etc.). But if you want to get your financial house in order and take control of your financial future, it’s important to ensure that you’re putting yourself at the top of your priority list—and then take action!
Automate Paying Yourself First
If you’re not paying yourself first, your money is more likely to be spent on things that won’t yield long-term benefits. To avoid this, my paycheck is deposited in an account I do not have a card for. So I cannot withdraw money unless I physically go to the branch – which is a big friction.
From this account, I set up automated transfers (just like I did for my bills) that deposit a percentage of my biweekly earnings into different accounts.
What follows is a quick rundown of how I used different types of accounts to pay myself first, by order of priority.
Retirement Accounts
When you save for retirement, you want to get a head start as soon as possible to maximize your savings potential. Don’t get too hard on yourself if you didn’t start saving for retirement in your 20s – the best time to start saving is always today! Time is your ally either way.
For Canadians, I cannot recommend enough to maximize your Registered Retirement Savings Plan (RRSP) contribution room. Saving for retirement means that you could pay less taxes today since deductible RRSP contributions can be used to reduce your taxable income!
The Government of Canada also offers the Canadian Retirement Income Calculator to help you estimate the revenue you would need in retirement.
Where does the money for your contributions come from? Either a portion of your paycheck or from maximizing matching RRSP contributions from your employer if you’re under a corporate group plan.
Emergency Fund
If I have used some of my emergency fund, I will replenish it. If I haven’t used it, instead, I will contribute more to my retirement account or my project fund.
Since I don’t typically use my emergency fund, I am okay to keep that money in a Tax-Free Savings Account (TFSA) – Canada only (I’d lose some contribution room if I withdrawn, but I don’t mind). Any amount contributed as well as any income earned is generally tax-free. Also you don’t get taxed on withdrawals – as opposed as with RRSPs.
“Project” Funds
These are accounts I set up for big purchases I have planned in the next 4 to 6 months. For instance, getting a super tuned Macbook Pro or an international trip. If I have simultaneous projects, each gets a dedicated transfer. I typically empty these accounts 3 to 4 times per year.
This money could be in standard savings accounts but I choose to keep it in high-yield savings accounts. It may not earn a whole lot in interests but in my opinion it is still better than to let the money sit in a chequing account.
“Just in case” Savings Account
It’s typically one month worth of my fixed expenses, and 5% of each paycheck. It’s to account for any banking or paycheck issues that could occur during any given month.
If you guess that I don’t have cards for any of these accounts, you guessed right! I only have a card for my main chequing account where, since my bills are automated as well, I deposit discretionary income for the planned expenses of the month.
I love that my financial goals are mainly on auto-pilot but I recognize that it may not work for everybody. It took me years to put that system in place and I still tweak it to this day!
How About Investing?
Investing is an excellent strategy to amass riches and ensure you’re always financially secure.
All the accounts mentioned above could be investment accounts. It depends on your strategy, your goals and you should definitely have that conversation with your financial advisor.
I personally chose a mix of investment accounts (stocks, bonds through mutual funds, etc.) with varying levels of risk tolerance, high-yield savings accounts and standard saving accounts. I re-visit this financial mix every single year.
How I started? I had little money to invest initially, so I did dollar cost averaging. It means that I invested the same amount at regular intervals, regardless of the ups and downs of the stock market, until I reached my first financial milestone: saving $1,000.
TL;DR – Pay Yourself First
To pay yourself first isn’t just about investing in the financial stability of your future self.
- Investing towards your desired quality of life at retirement will ensure that you approach that phase of live with peace of mind. You won’t have to work unless you want to!
- Saving will make help you build up a buffer against difficult times in the future so you’ll feel more financially stable.
- Prioritizing yourself encourages you to live a happier and more fulfilling life today by spending money on things that matter to you in the long run instead of on debt payments and other obligations.
Start small by setting aside fixed percentage of your monthly income, and gradually increase the amount as you become more comfortable with this practice. You’ll be amazed at how simple it is to get started and how rewarding it can be when your finances work in your favour.
Onto the third post of the series!
