We all know that putting money aside each month, when possible, is super important.
Doing so enables us to build a safety net.
Even better, it lets us invest in our future goals.
There’s just one problem: it’s psychologically hard for us to move money from our bank account to our investments.
We work our tails off to get paid, and we like that money where we can quickly grab it when we want it.
But, leaving it sitting around where we can spend it now makes it almost impossible to reach our goals.
That’s why, here at abroaden, we’re huge fans of “pay yourself first.”
This fantastic concept makes saving and investing fool-proof, effortless, and rewarding for expats, remote workers, and others living abroad.
Not familiar with paying yourself first?
We got you covered.
What is “pay yourself first?”
“Pay yourself first” is this fantastic concept we have in financial planning.
The idea is simple: you need to take care of the “future you” by making investments.
Unless you plan to work forever, you’ll need to find a way to pay yourself when you’re retired (or taking a career break, or whatever your goal is).
To do so, you need to make sure your money goes to work for your future self first before the current you have the chance to spend it.
That way, your money goes directly into your savings, or even better, investment account.
Why is pay yourself first so important?
Despite being cold, logical numbers, money is deeply physiological for us.
Our relationship with it can very much control our lives.
Fear of financial insecurity or running into an emergency we can’t afford sends our emotions into overdrive.
Instead of letting reason drive our thought process, our emotional brains panics and tells us to save our cash instead of growing it.
Throw in that investing involves risk and is scary, and we can clearly see why so much money idles away in savings accounts.
It’s no surprise that over 60% of Americans fear investing more than not having enough money at retirement.
Here in Europe, where we’re even more risk-averse, it’s even harder to part with our cash in the short term.
The data reflects this mentality.
According to the European Central Bank, over 1.75 trillion EUR were sitting in consumer bank accounts by the end of summer 2021.
At the same time, households only had 500 billion EUR in investments (page 16 in the link if you’re curious).
We totally get it. We’re human, too, and we naturally fall back to comfort over risk.
But that’s not really an excuse.
If we want to reach our financial goals, we need to put our money to work for us as fast as possible.
If you look at the numbers, it’s clear to see the power of paying yourself first.
For example, let’s say you had 15,000 EUR sitting in a savings account that you wanted to invest for retirement in 25 years.
You’re also able to save 300 EUR a month from your paycheck to your retirement plan.
You have three choices:
- Invest your 15,000 EUR in one go and keep spending your 300 EUR.
- Invest your 15,000 EUR in one shot and then put 300 EUR each month in a savings account automatically.
- Invest your 15,000 EUR to start your plan, then automatically add 300 EUR each month to your investment account.
You found a couple of ETFs that returns 8% interest annually for the investment. The savings accounts get 0%.
In the first scenario, you wind up with 109,000 EUR, or 360 EUR a month if you follow the 4% rule.
You almost double your return in the second scenario, coming out with nearly 200,000 EUR or 660 EUR a month.
Finally, in the last case, you’ve paid yourself first to the tune of 395,000 EUR or 1,300 EUR a month for the rest of your life.
If it wasn’t clear before, it is now: paying ourselves first rewards us handsomely down the road – and all with no effort.
How do I pay myself first?
It sounds intimidating at first, but in reality, paying yourself first takes a few minutes of work.
Step 1: Determine your future goal.
Before making any investment decision, you need to figure out what you want to achieve.
It doesn’t have to be complicated, but you want to set some general guidelines by asking yourself the following questions:
- “What do I want to pay myself first for?” It can be for retirement, your child’s education, purchasing a boat, saving up for a career break, or just growing your wealth.
- “How much risk am I willing to take to get there?” Since you’re trading cash today for (hopefully) more money later, you always want to be comfortable with the risk needed to get there. There are many ways to grow your portfolio. You need to choose one that works best for you and doesn’t keep you up at night.
- “Where do I want to be when I reach my goal?” For those of us living abroad, there’s a good chance we’ll be paying ourselves in a different country than when we start. If that’s your case, be sure to consider currencies (if applicable).
- “What investments match my goals and my risk?” Once you know what you want to achieve and how much risk you can take to get there, you should find matching investments.
Having trouble finding out your risk limits? Use our tool to quickly learn where you stand!
Step 2: figure out how much you can set aside each month for that objective.
Now that you have your goals and investments, it’s time to figure out how much you want to set aside for this goal.
Have trouble calculating what you should be saving and investing?
We’re fans of the 50-30-20 rule. This nifty guideline acts as a quick budget for managing your money.
- 50% of your salary should go towards essential living expenses (rent, food, utilities, etc.)
- 30% is for having fun
- 20% goes towards saving and investing.
Taking 20% of your salary and putting it towards your goals is an excellent starting point.
As a bonus, you can kickstart your goal with a ‘lump sum’ at the beginning. We did that in the example above in the 3rd scenario.
(For reference, if you were to only invest 300 EUR each month at 8% for 25 years, you would have 285,000 EUR or 950 EUR a month. That’s definitely not bad, but the extra 15,000 EUR pays you 109,000 EUR more!).
Step 3: Set up a direct debit on payday for that amount.
Here’s the part where you get to pay yourself first!
Now that you know how much you can put aside each month, it’s time to set up a direct debit to make it happen.
Go to your banking app or web dashboard and look for something called “direct debit” or “standing order.”
(If you can’t find that exact tool, try searching on your bank’s website. They should have this feature).
Set the amount you want to be moved.
For the day, select the day you get paid each month. This part is vital as you want that money to leave your bank account before you can touch it!
Finally, set up the direct debit to go to savings, or even better, an investment account.
Step 4: Let the money go to work for you.
Once your money hits the savings or investing account, it can get to work growing for your future goals.
If you’re investing and not saving, you’ve ideally set up an automatic plan.
That way, your money from your bank account goes directly into whatever fund or investment you chose earlier.
If not, you’ll need to manage that part manually. Of course, that’s not ideal, as you could wind up not following through.
Many investment services have a feature. Others even help you from start to finish, guiding you from setting goals, determining your risk comfort, and building a plan made for you.
In any case, congrats! You’ve paid yourself first!
Why paying yourself first is so important if you’re an expat or remote worker.
For people living abroad, paying ourselves first is even more crucial as we don’t have the investment options locals take for granted.
After all, we pay social security into different countries, and domestic pension plans are a terrible fit for us.
Unlike most people, we’re dependent on our investments and savings to give us the financial future we dream of.
It’s scary as hell, but with a bit of work or the right partner, you can pay yourself first, regardless of where you call home.
Make paying yourself while living abroad even easier: sign up for abroaden and automate your investing regardless of where you call home.