Most people around the world manage their finances in the following manner:
Step 1: Income flows into their account
Step 2: They pay for the mandatory expenses–rent, electricity, phone, internet, EMIs, food etc.
Step 3: They then make the discretionary expenditures–shopping, dining out, leisure activities etc.
Step 4: If there is any money hopefully left over, they save and invest it.
We are going to make one minor but critical tweak to this process. And that will set the foundation of your financial planning journey for the rest of your life. Each month, before spending on anything, you will park away some funds for saving and investing. So the process will be as follows:
Step 1: Income flows into your account
Step 2: Pay yourself first and move a fixed amount out for savings and investments.
Step 3: You then pay the mandatory expenses–rent, electricity, phone, internet, EMIs, food etc.
Step 4: Use whatever is left over for your discretionary expenses–shopping, dining out, leisure activities etc.
This strategy is called “Paying Yourself First” and is considered one of the golden rules of personal finance. We have simply moved Step 4 to Step 2. And are treating “Savings and Investments” as you would any other mandatory expense, no different from rent or your phone bill. So that every month when your income comes in, you first pay yourself which means transferring out a fixed amount to save and invest. And then you pay the other mandatory expenses. And finally, use whatever is left over for your discretionary expenses.
The most obvious advantage of doing this is that you are saving and investing in a disciplined fashion every month.
Money gets invested before you can spend it, and you are leaving nothing to chance. Another benefit is that you have de-prioritised your discretionary expenses and moved them to the bottom of the pyramid. So you are first saving, then paying your rent, utilities and other mandatory bills, and only then spending on the items that are not sheer necessities. This is a far more prudent way to operate.
The best way to operationalise this is through a monthly standing instruction from your bank account to a savings/investment account. Choose the amount you want to save each month and set up the instruction for any convenient date–whether the first of the month, the day your salary gets credited, or any date that makes sense. But each month, money should automatically get debited and invested without your intervention. You need to absolutely foolproof the process.
Generally, one has few sources of income, but when it comes to expenses, one ends up making payments to all and sundry. If you review your credit card statements, UPI transactions, and bank accounts, you are likely making dozens of payments to various corporations, apps, vendors, and service providers. I want you to add one more payee to the list: yourself. And each month, pay yourself first.
Rishi Piparaiya has held senior leadership positions in wealth management, strategy, sales and marketing with leading financial services organisations, including Citi, Aviva and Banco Santander. He achieved financial freedom by age 40 and left his corporate job to pursue his passions. He is now a bestselling author, world traveller and angel investor.
FAQs
Golden Rule #1: Don't Spend More Than You Make
What is the golden rule of personal finance? ›
3) 50-30-20 Rule
The rule says that a person should divide his/her take-home salary into three categories: needs (50%) wants (30%) and savings (20%). “The rule's simplicity lies in its ease of comprehension and application, which enables each person to set aside a fixed portion of their monthly income for savings.
What is the #1 rule of personal finance? ›
#1 Don't Spend More Than You Make
When your bank balance is looking healthy after payday, it's easy to overspend and not be as careful. However, there are several issues at play that result in people relying on borrowing money, racking up debt and living way beyond their means.
Is the 50/30/20 rule realistic? ›
The 50/30/20 rule can be a good budgeting method for some, but it may not work for your unique monthly expenses. Depending on your income and where you live, earmarking 50% of your income for your needs may not be enough.
What is the 50-30-20 budget breakdown? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
What is the golden rule for personal? ›
The golden rule for personal accounts is: debit the receiver and credit the giver. In this example, the receiver is an employee and the giver will be the business. Hence, in the journal entry, the Employee's Salary account will be debited and the Cash / Bank account will be credited.
What is the golden rule the best rule? ›
The “Golden Rule”—“Love your neighbor as yourself”—is doubtless the most widely known and affirmed ethical principle worldwide. At the same time, it has its serious, quasi-serious, and jocund critics.
What is the golden rule of money? ›
Understanding the Concept of the Golden Rule. Before we dive into the details, let's first understand the concept of the golden rule of saving money. Simply put, it states that you should always save a portion of your income before spending it.
What is the 80% rule personal finance? ›
The 80/20 budget is a simpler version of it. Using the 80/20 budgeting method, 80% of your income goes toward monthly expenses and spending, while the other 20% goes toward savings and investments.
What is the 4 rule personal finance? ›
The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.
Living on $1,000 per month is a challenge. From the high costs of housing, transportation and food, plus trying to keep your bills to a minimum, it would be difficult for anyone living alone to make this work. But with some creativity, roommates and strategy, you might be able to pull it off.
Is $4000 a good savings? ›
Ready to talk to an expert? Are you approaching 30? How much money do you have saved? According to CNN Money, someone between the ages of 25 and 30, who makes around $40,000 a year, should have at least $4,000 saved.
Is the 30 rule outdated? ›
The 30% Rule Is Outdated
To start, averages, by definition, do not take into account the huge variations in what individuals do. Second, the financial obligations of today are vastly different than they were when the 30% rule was created.
What is one negative thing about the 50 30 20 rule of budgeting? ›
Some Experts Say the 50/30/20 Is Not a Good Rule at All. “This budget is restrictive and does not take into consideration your values, lifestyle and money goals. For example, 50% for needs is not enough for those in high-cost-of-living areas.
How do you budget 50 25 25? ›
Set up a plan where you do the following: Invest 50% of your salary for your future. Set aside 25% for taxes. Spend the remaining 25%
What is a 5 15 50 budget? ›
50 - Consider allocating no more than 50 percent of take-home pay to essential expenses. 15 - Try to save 15 percent of pretax income (including employer contributions) for retirement. 5 - Save for the unexpected by keeping 5 percent of take-home pay in short-term savings for unplanned expenses.
What does golden rule mean in finance? ›
The Golden Rule states that over the economic cycle, the Government will borrow only to invest and not to fund current spending. In layman's terms this means that on average over the ups and downs of an economic cycle the government should only borrow to pay for investment that benefits future generations.
What is the basic golden rule? ›
The most familiar version of the Golden Rule says, “Do unto others as you would have them do unto you.” Moral philosophy has barely taken notice of the golden rule in its own terms despite the rule's prominence in commonsense ethics.
What is the golden ratio in personal finance? ›
The golden ratio budget echoes the more widely known 50-30-20 budget that recommends spending 50% of your income on needs, 30% on wants and 20% on savings and debt. The “needs” category covers housing, food, utilities, insurance, transportation and other necessary costs of living.
What is the golden rule of financial success? ›
Spend less than you make
This may seem obvious, and boring, but spending less than you make is by far the biggest key to financial success. If you struggle with spending, focus on this one rule until you're at a point where you have positive cash flow at the end of the month.
