Pay Yourself First

We always hear an advice saying that we should save at least 20% of our salary before we pay for our expenses and I absolutely agree. But where do we put this 20%? Do we just leave it at the bank? Piggy banks, anyone?

In the book “Wealth Within Your Reach” by Francisco Colayco, he explained what we should do with the 20%. According to him, this should be allocated among 3 funds namely emergency fund, insurance and investment.

1. Emergency Fund – Half of the 20% must go to your emergency fund. As the name implies, this should be used in case of emergency only (i.e., losing your job). You should save an equivalent of at least 6 months worth of your monthly expenses because it is assumed that that’s how long you can recover from an emergency (e.g. finding a new job). 
2. Insurance – This is an item we Filipinos normally pay no attention to. But personally, I believe that if you are generating an income and your family is relying on it, then it is vital to protect yourself by getting an insurance. We don’t want our loved ones to carry the financial burden when something unexpected happens to us. According to some financial advisers, the amount of insurance coverage must be at least 2-3 years worth of your annual income. 
3. Investment - After allotting for emergency fund and insurance, the balance should be invested. Always remember to invest your money where you can earn higher than inflation which is about 5%, otherwise your income will just get eaten by it. You might wonder, the balance will probably be just a small amount, where in the world can I invest it and get good returns? I always suggest to invest your money in mutual funds. I thank God for the person who invented it. :) Mutual funds lets you invest in stocks or bonds with at least P1k (but initial investment must be P5k). Professional fund managers pool all investments and place it in blue chip or good performing companies and generate good returns, around 10% at the lowest. I'll discuss more about mutual funds in my succeeding posts. 

 Those are the things that I religiously do every payday. It will be challenging at first. But my goal to be able to provide college education for my kids in the future and retire with enough funds keep me fueled to pay myself first every single day.