Pay Yourself First: I always talking about pay yourself first in most of the articles. What does it mean? Have you ever thought about why I always told in my articles about pay yourself first?
The concept of pay yourself first I read in the year 2018 for the first time in the book “RICH DAD POOR DAD.” At first instance, I read & let it go. But when I read it again a year later, then I understand it a little bit.
The actual concept of pay yourself first is given by “George Clason” in his book “The Richest Man in Babylon.”
You know whenever we get our paycheck, the first thing that comes in our mind. We think about expenses to cover, expenses like Rent Payment, Bill Payments, groceries, insurance utilities, etc. And afterward, whatever is left, we spend our life till the next paycheck to come. This paycheck-to-paycheck life is continuous. That is the concept of “PAY YOURSELF LAST,” where we all struggle financially.
Before reading further, remember below lines given by Kiyosaki:
“Paying yourself is not easy. It can be scary, especially when the bills are piling up. But you must develop the self-discipline to do it.”
Now, if you check the above infographics, you will see the actual difference.
He told that pay yourself first is not an easy task. Yes, this is true because you are not able to send all your income to your savings. You need money for your living & also need to pay your bills.
CONCEPT WITH EXAMPLE
Suppose you have an income of ₹50,000 per month and annually ₹6,00,000 lacs. You pay yourself first & park your income into SIP (Asset buy from Savings).
And you receive a 12% return annually. Now, check the below table:
In just 4yrs., you accumulated ₹24lacs in your assets with an extra monthly income of ₹18,000 per month.
Check carefully I have not considered the salary increments in these 4yrs. If you can consider increments, the savings would have more with more monthly income.
The utmost difficulty in this concept is the adaptation of parking your whole salary into savings. Because you need money for your livings as well.
DIFFERENT WAY TO PAY YOURSELF FIRST
If we adopt the concept, you will achieve financial independence in just a few years.
But yes, the adaptation is difficult because you have expenses for living,
To overcome this, you need to approach differently to pay yourself first with the ratio distribution rule.
Later or sooner, it will lead to financial independence.
SCENARIO – I
Suppose you have ₹50,000 income per month for the next 10yrs.
10% portion of your income you park in SIP that yields 12% return.
You increase your SIP by 10% every year.
Check the below table carefully for SIP distribution that is increasing 10% every year.
You will find ₹33 lacs in your account after 10yrs that gives you ₹27,000 monthly income, which is 54% of your initial salary income.
From the 11th year onwards, if you stop adding your income to your savings, you still have your ₹50,000 income in your hand along with ₹33,000 additional income for your living.
Your total living income become ₹50,000 + ₹33,000 = ₹83,500/-
Additional ₹27,500 income is your passive income for which you need to work extra.
Now, you have ₹50,000 income per month & getting a 7.5% increment every year. And you park your income in the same fashion as you have done in the scenario-I.
See below Table:
After 10yrs, you have a monthly income of ₹95,862 & your monthly passive income is ₹40,202 per month.
In addition to this, you have ₹51.7 lacs in your account, only doing your job.
From the 11th year, if you get a 7.5% increment in your salary, it will become ₹1,03,051lac per month & you have an additional passive income of ₹51,706 per month.
Your total living income become ₹1,03,051 + ₹83,500 = ₹1,86,551/-
Your passive income is almost more than 50% of your income. It is up to you if you continue this process after 10yrs or not. If you continue, your accounts and your passive income grow every year. And you need not work anymore once you start living on your passive income.
This passive income alone able to make you financially free.
That is the whole concept of “Pay Yourself First.”
BENEFITS OF PAY YOURSELF FIRST
- Build your assets.
- Yields your passive income.
- Make you able to control your expenses.
- Achieve your financial freedom only by doing the job.
- Increase your financial knowledge.
- Build the patient level in yourself.
- Increase your self-discipline.
Robert Kiyosaki himself achieve their financial freedom at the age of 45 years. He struggles a lot during this process, piling up their bill’s month on month.
But at last, the happiness of financial freedom is almost out of this world. He told the concept is not so simple, that is why the majority in this world do not follow it.
“When you have passive income coming in each month from your investments, you don’t need a job & you don’t need a salary. You are financially free & only then you are truly rich.”