Most of the time, when it comes to budget management, most of us will allocate our income into various categories of expenditure. This ensures that there is sufficient money to cover our monthly commitments such as housing loans, car loans, bills, and essential expenses like food, personal care, transportation etc.
However, we often overlook savings in our budgets, thinking of it only after covering expenses. But, like other essentials, savings should be treated as a necessity in any budget. Setting aside money early ensures you're prepared for future needs —whether for periods of lower income, unexpected expenses, or emergencies.
This has caused inconsistent saving habits among our society, with significant potential impacts on our own financial resilience in thelong term. This is supported by findings from Bank Negara Malaysia’s (BNM) Financial Capability and Inclusion Demand Side (FCI) Survey 2021 which revealed that 47% of Malaysians struggle to raise even RM1,000 in times of emergency.
Read also: Why A Bigger Income Doesn’t Mean Bigger Savings
What does it mean to pay yourself first?
Pay yourself first is a reverse budgeting approach that includes savings as one of the key budget items. The first thing to do after receiving your income is to set aside a portion for savings before allocating the remainder to various categories of expenditure. By using this approach, you treat your savings as a compulsory part of your budget.
How does the pay-yourself-first budgeting help you manage finances more effectively?
1. Build up an emergency fund to cover expenses for unexpected events
Aim to accumulate money equivalent to 6 months’ worth of expenses as your emergency savings. This will help to ensure that your day-to-day activities can continue smoothly in the event of an income shock such as reduced income, job loss, and medical emergencies.
2. Avoid spending all your income and leaving nothing for savings
Receiving an income can be an exciting moment and it is a reward for your hard work. However, by setting aside a portion of your income for savings first before spending, you can ensure you have set aside money for future needs.
Read also: How to Lose Your Savings In 10 Days (But, Maybe Don’t)
3. Improve financial resilience in the long term
By making savings a compulsory expense for yourself, you are one step closer to enhancing your long-term financial resilience. Regular saving helps build a solid foundation, hence improving your overall financial well-being and contributing to better quality of life by reducing financial worries over time.
3 tips to make pay-yourself-first budgeting work
1) Open a separate bank account for savings and transfer the portion for savings into that account after receiving your income. Set standing instructions with the bank for the transfer to ensure that you will not miss saving.
2) Adjust your expenses and allocate a portion of your income for savings. Start with a small amount first and increase the amount over time.
3) Apart from saving in a bank account, consider using a portion of your savings to top up your EPF savings through Voluntary Contribution. With the KWSP i-Akaun app, you can boost your EPF savings effortlessly. With just a few taps, you are not only enhancing your retirement fund but also investing in a secure and meaningful future for yourself.