Have you ever experienced a situation where you had what seemed like a solid expenditure plan until the actual money landed in your account and the situation became different?
The fact of life is that if you do not set up the right accountability measures, you are most likely to fall short of your very own expectations. And this is often manifest in people’s ability to adhere to their saving goals.
Indeed, if you were to do a random survey among your colleagues, chances are many will say that they do not save as much as they would want to. Not because they are not aware of the benefits of saving, but because they struggle with implementing their own savings plans.
This problem often manifests in procrastination and impulse purchase behaviour which can be a great hindrance to your financial wellbeing.
Among campus students, this is jokingly referred to as “reducing money to management levels” where it is common to find a student with a myriad of pressing financial needs spending HELB money on luxuries and wants so that their money can fail to “manageable levels”.
Unfortunately, by the time the money is at a “manageable level” it is already less than their financial needs. “Manageable” because the student perceives the HELB money as a big windfall that would be impossible to deplete too soon.
While you may think the problem is more prevalent among students who are still learning the ropes of financial management, it is also as common even among early career professionals, the middle-aged and those with decades of experience - albeit with more nuances.
The good thing is that psychologists and financial advisors have come up with various strategies that ensure you can avoid procrastination and get better at implementing your personal financial goals - whatever they might be.
One of the recommended steps is to adopt the concept of paying yourself first. It probably sounds ironic that the solution to avoid misusing your own money is to “pay yourself” first, right?
Paying yourself first is a personal finance strategy that involves allocating a portion of your income towards savings or investments before paying for any other expense.
In other words, it means treating your savings or investment account as a bill that must not only be paid each month, but paid as the top priority.
This is as opposed to the connotation that “paying yourself” may Evoke of rewarding yourself with material purchases.
The concept of paying yourself first is based on the idea that you should prioritise your financial future by setting aside money for savings or investments before you pay for anything else - even food and rent.
This ensures that you have a steady stream of funds going towards your long-term financial goals, such as building an emergency fund, buying that ka-plot you have been dreaming of, buying/building a house, or even actualising your retirement plan during your productive years.
To pay yourself first, you can set up an automatic transfer from your current account to your savings or investment account each month. This ensures that a portion of your income is set aside before you have a chance to spend it on other expenses.
The goal is to make saving a priority and to allocate funds towards your long-term financial goals before you spend money on anything else.
This article offers you a practical guide on how you can ensure you pay yourself first, using a case study of the Absa One account.
A personal budget is a great start to getting your personal finances in order. Just like great organisations achieve success by sticking within their budget, personal finances are greatly impacted by the presence or absence of a great budget.
A budget allows you to prioritise your income to the things that matter most to you. In this context, experts advise that your budget should prioritise your savings, as a form of paying yourself - after all, you worked hard to earn it.
There are a number of budgeting guides, commonly known as budgeting rules, that experts have come up as a way of maximising the value of your income.Here are some of them:
Under this rule your net income is split into two categories; regular expenses and savings.
The regular expenses budget should take up a maximum of 60% of your budget and includes essentials such as rent, medical cover, debt repayment, school fees, among others. It also includes your wants such as entertainment, travel, discretionary food expenses, etc.
The second category is your savings which should take up a minimum of 40% of your net income and includes both short and long term savings.
This recommends allocating 50% of your income towards your needs (essentials such as rent, food), 30% towards your wants (non-essentials such as travel, tv subscriptions etc.), and 20% towards savings.
Under this budgeting rule, it is recommended that your net income is split into three categories - monthly expenses (70%), savings/investments(20%), and paying down debt(10%). Experts particularly recommend this rule for people who are struggling with debt servicing and high recurring bills.
The rule stipulates that 50% of your income should go towards basic needs and mandatory bills. These include rent, transport, food, healthcare, basic shopping, education, etc.
The rule further requires 40% of your total income to go to savings while the remaining 10% is used for wants or non-essential bills.
A current account works in many ways as a wallet that receives your income and enables you to make payments.
Having a great current account is a significant step in organising your finances because it impacts how you access your money and the tools and resources provided to enable you to make the most out of the money you are earning.
Some of the features to look out for in a great current account include:
Automation allows you to save without actively thinking about it. In other words, it ensures your savings are not dependent on human memory. This is a great step in your journey of paying yourself first and it is advisable that you do not touch your savings for unnecessary withdrawals.
A great current account will allow you to automate to ensure you do not procrastinate or forget critical payments.
For example, a standing order to your savings account or to an outstanding debt ensures that an automatic deduction is made to your account on a specific day, say a few days after your payday.
A great current account should make it easy for you to track how you spend each shilling that leaves your account.
The net effect is that by tracking expenses, it becomes much easier to increase your savings - by identifying unnecessary expenditure.
Part of good financial planning involves planning for the unexpected. The nature of life is that we cannot fully anticipate every reality that may come our way.
However, we can prepare for it by leaving some spare funds to take care of the unexpected. For example, if your income is dependent on having a personal computer, losing it can be devastating financially.
However, that loss can be mitigated if you have an emergency fund to buy a new one without affecting your savings - funds that are meant to go to investments.
Debt can be a great avenue for growing your wealth. For instance, taking out a loan to start a business that returns much more than the invested amount can be strategic and financially empowering.
However, debt can also be expensive, especially if it is unplanned, high-interest, and cyclical. To ensure that debts are sustainable, it is prudent to ensure your budget priorities clearing of debt to meet your credit obligations and avoid escalation of debt to expensive levels which eats away into the amount that you should be saving.
Sometimes, the reason you are unable to pay yourself well, or save for that matter, is that your income is too little compared to your needs.
If the reason you are not saving more is because your income is too little, then it becomes prudent to identify ways of increasing and diversifying your income sources.
For example, you can start a side hustle, get a second job and work extra hours, or look for passive ways of making money such as referral programmes and affiliate marketing.
The Absa One current account stands out due a number of features which include:
The Absa One account offers you the chance to pay yourself first through a number of bespoke features including:
If you have multiple income sources, say you are in business, the Absa One account eases the process of tracking your income. Rather than manually tracking all your transactions, the Absa One account, through the Absa app, allows you to easily visualise your income as well as expenses.
All you have to do is to make sure you are paying out of the Absa One account for all significant expenses and you will have an indelible record of where your money goes that you can refer back to as many years as your account has existed.
Automation, as discussed, can go a long way in aligning your finances - by removing the burden of depending on human memory.
Once you come up with a personal budget on the amount you wish to save every month, it becomes possible to automatically contribute this amount to your savings account such as Absa Digital Savings Account that offers a category leading interest rate of 9% per annum compounded monthly.
All you simply have to do is create a standing order instructing the bank to be transferring the specific amount you want to save at a specific date (typically after your regular payday) every month to your savings account.
Now, you don't have to remember to save.
Beyond automating your savings, the Absa One Account allows you to automate debt repayments which ensures you meet your credit obligations on time, even when your memory may not be perfect.
This ensures you are never behind on your repayments which could have potentially increased the overall total cost of the credit if you were to incur penalties.
The Absa One Account allows you to access specially negotiated insurance policies for Absa customers through the Absa bancassurance service.
Bancassurance is a partnership between a bank and insurance companies to provide the bank’s customers with insurance services seamlessly - as compared to the customer approaching the insurance company independently.
As such, opening the Absa One account gives you to access, at competitive rates, to insurance products such as:
The benefits with using this model include:
The Absa One current account allows you easy access to short term investment options such as the Absa unit trust funds. You also have access to discounted home home loans, vehicle finance and unsecured loans of up to Ksh6 million for personal customers and Ksh10 million for business customers
Saving is an act of paying yourself first because it involves safeguarding your future. It is recommended to always set aside a portion of your income as savings as the very first thing you do whenever you get paid.
However, this is not always easy as human beings are naturally prone to procrastination.
One solution to this is to keep your money in a current account that allows you to automate saving and easily track where your money goes as has been discussed above.
The Absa One current account is one such account. It has a number of features that ease your savings journey including easy automation, ability to track income and expenses, consolidation of all your financial needs including insurance and investment, among others.