Principle 3: Pay Yourself First and Do It Automatically

Note: This article is a part of series called “Six Principles to Achieve Financial Freedom”. I’d strongly suggest starting from Principal 1 it to understand it better. Ignore if not applicable.

If you want to become financially successful, then you must stop paying other’s before you pay yourself first and create a mechanism to do it automatically.

What do I mean by this?

Whenever I talk about pay yourself first, it reminds me of a story about my friend. Let me share that story with you here.

He is an engineer with a nice job in a reputed company and earned about Rs.1,00,000 monthly. Considering the fact that he worked so hard to get his engineering degree and a decent job, he thought he now deserve a good standard of living.

He always had a dream of owning a beautiful car one day so that he can show to his friends and relatives with pride. Hence he bought a beautiful car worth Rs.21 Lakh on loan and paid Rs.44,000 monthly as an EMI.

He was excited and happy with this decision however after a few years, he realized he made one of the worst mistake of his life.

He don’t love the car anymore as its a huge expense to use it for daily purpose. After paying rent, groceries bill and other expenses, he was left with little to no savings. His mistake was simple, he did not do any calculation before making that commitment of loan of such a long period and bought something he couldn’t afford at that time.

The most dangerous part is that his banks now was deducting a fixed amount every month just after he gets the salary. So he was paying to the banks first before anyone else. Moreover, the payment was going for a depreciating asset and even if he decide to sell the car, he would still have to pay from his pocket to settle the loan amount.

Many of us make the same mistake, how?

When most people receive their salary at the beginning of the month, 30%-50% of it goes to their landlord for rent or for home loan EMI, 20% of it goes to the local grocery store, 30% goes to random bars, luxuries, and ecommerce sites and the remaining 20% is eaten up by their desires.

Before the end of the month, they are left with little to no money and waiting for the next payday. Sometimes they even stretch their spending limits though a credit card/loan or by borrowing.

This is the worst way of managing money. It simply indicates that your banker, landlord, local shop owners and ecommerce sites here are the real winners. They are attracting you to buy things you don’t need or can’t afford and we’re falling into that trap just because it’s on discount or he/she too have it so I should have it too. 

Moreover, banks take the money from us automatically in the form of EMI. The real meaning of EMI is “Equated Monthly Installments” but 95% of the people think the full form of EMI is “Easy Monthly Installments”. Why? it’s because the banks make it look easy when you go to buy but ask anyone who actually pays EMI whether it’s actually Easy.

“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.”

Will Rogers

We need to understand the fact that banks are not our friends. They are in our society to do business and make money. Banks are “For-profit institution” and government supports them for two reasons. 1. They give revenue to government in the form of tax. 2. They help in increasing the spending power of common people which eventually helps in increased GDP.

However, increased spending has no direct relation to our income. Banks are giving us the power to spend more and stretch our spending, however our productivity and income remains unchanged. The earlier we understand this concept, the better.

Hence, if you want to be a winner in the game of money, follow this golden rule: “Pay Yourself First and Do It Automatically.”

How to pay yourself first?

You work hard all day for your money, don’t you? As soon as you get your salary, set up your accounts so that at least 10% or more (more, the better) of your income is automatically deposited into a personal investment account (mutual funds, stock, ELSS) or long term retirement account (NPF, PPF or ELSS) or save for future investment deals like buying a property etc.

When you invest your hard earned money in these accounts, your money will work for you. Moreover, you will enjoy the power of compounding. Do you want to know the secret of rich people? They don’t work for money, their money work for them. Setting aside a sum of your earning is the first step towards your financial freedom.

In the earlier example of my friend, he could have simply invested that money instead of buying an expensive car and he would have saved a lot of money for his child’s education, early retirement or for his own house.

Remember this famous quote from a legend.

If you don’t find a way to make money while you sleepyou will work until you die.”

Warren Buffet.
Make money while you sleep, how?

Making money while you sleep is just another term for passive income. It simply refers to the money that comes in every month automatically, without or little intervention. Most people think about real estate rental income as passive income. But, there are so many other forms.

The best way of making money when you sleep is by investing them. It doesn’t matter how much you earn, even a small amount invested can become a huge amount in the long run with the power of compounding. You can checkout the list of popular investment options in India here.

“Try to save something while your salary is small because it’s impossible to save after you begin to earn more.”

Jack Benny

You can then create a budget with the remaining amount and stick to it. Or second option (my favorite), you can simply invest a large portion of your salary automatically and then you’re free to spend the remaining amount. This will force you to cut costs and prioritize your future self over your present pleasure. If you don’t take control now, then you are going to live with the same habits in future.


We first make our habits, and then our habits make us.

John Dryden

It’s difficult to implement but it’s essential for your financial success. It’s you who have to bring that change now, no one else is going to do it for you.

Finally, I’ll end this post with this quote.

It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.

Robert Kiyosaki

Share your thoughts! :)