Every month on your payday, immediately set aside a fixed percentage of your salary before spending or using it to pay your bills. Why do we do that? Think of it as paying your future self a salary, this amount that you put aside is to make sure that your future self will have enough money to pay for that down payment of your house or have enough cash buffer for emergency or ultimately for your retirement.
What amount is enough for this purpose? A simple guideline would be anywhere from 5-10% of your net monthly salary.
So if you are earning a gross salary of $2,500 per month, in Singapore, you need to contribute 20% of your pay to CPF, making your net salary $2,000. Let’s say you decided that you want to pay your future self 10%, this means that you will be putting aside $200 per month towards this purpose.
Then again, 5-10% is just a guideline. You decide how much your future self is worth. If you think that your future self is more important than your current self, you can even allocate more than 10%. Keep in mind though to ensure that you have enough left to pay the bills and have an adequately comfortable standard of living.
So how should we pay ourselves first? Preferably, this amount of money is parked in a place where it will be difficult for you to access or maybe even have a certain penalty if you dig into it before a certain period of time.
One common strategy is to park this money into a separate bank account. To make these funds less accessible, you can keep the ATM card for this separate bank account at home so that you are less likely to withdraw money from this bank account to pay for your expenses.
If for whatever reason, you start to feel that it is getting difficult to pay your bills or you don’t have enough to spend, do not immediately cut back on this amount that you put aside. Instead, look into your spending habits and see where you can cut back on your spending (refer to ‘Understanding your spending thoroughly’ below).
Remember, this amount is set aside is akin to paying your future self a salary. Imagine how would you feel if your boss stopped paying you your monthly salary? That’s exactly how your future self would feel – short-changed.