Like it or not, money plays an important part in our lives. I grew up without much knowledge about money or finance management. Studying abroad alone at 19 years old was the turning point that kind of “forced” me to educate myself financially. In this post, I will share with you my “pay yourself first” mentality that I have been following for the last few years in Finland.
Paying yourself first means when you receive your source of income, the spending should be in this order:
- Firstly: your fixed expenses
- Secondly: your investment and saving
- Finally: other purchases
1. Fixed expenses
So, what are fixed expenses? If you notice, every month you will have certain recurring payments. In Finland, the biggest piece of monthly expense is normally rent/mortgage. Besides accommodation costs, you also have to pay for utility costs (water, electricity, Internet, phone, etc..). Additionally, groceries costs are an irreplaceable expense. These costs are normally quite stable and predictable, in other words, they are fixed expenses.
In my own personal finance strategy, debt should be avoided as much as possible. This “pay your self first” mentality not only guarantees that I have shelter and food to sustain a functioning life but also helps me avoid attaining any debts. That is why the first thing I do after receiving my salary is to transfer this fixed amount of money to my spending account which I use to pay the above-mentioned costs.
2. Saving and investment
After fixed expenses, the next thing I always do is to transfer money to my saving and investment account. As a general rule, everyone should stack up an emergency fund that can cover their 3-month living expenses. Let’s say your monthly living cost in Finland is 1200 euros (1000 euros fixed expenses + 200 euros for unexpected expenses), then it is absolutely necessary for you to have a minimum emergency fund of 3600 euros. An emergency fund can be a saving bank account or an investment account that you could convert into cash quickly.
The reason an emergency fund is “mandatory” is because life is full of surprises. You never know when you may get laid off from your job, or your car suddenly breaks down, or you have a sudden illness that requires immediate treatment and your insurance won’t pay the money upfront…In those unexpected cases, a cash cushion will come in handy and help you land gently from the crashes. This emergency fund will help you sleep better at night!
After you have saved enough for the emergency fund, the next step is to educate yourself and start investing. A saving bank account is not a very good place to store your money at the time of writing this blog post, given the extremely low interest rate (0% interest rate in most banks in Finland). The inflation rate would quickly devalue your hard-earned money. This explains the need for each individual to learn about investing in order to preserve wealth.
As Einstein said: “Compound interest is the 8th wonder of the world”, investing indeed holds immense money-generating power over a long period of time. There are many investment instruments out there. Warren Buffet suggested: “A low-cost index fund is the most sensible equity investment for the great majority of investors”. For the average person who doesn’t have a lot of time to do market research, index funds seem to be a safe bet. However, make sure you do your careful research before putting your money into any kind of investment! I currently don’t feel confident enough to dwell on this investing topic. Hopefully, in the near future, I could write a blog post about my personal experience in investing in Finland 🙂
Below are some interesting reads that I find helpful to learn about investing in Finland:
3. Other purchases
After paying the above money (for yourself!), the leftover money is your guilt-free money. After the big chunks of fixed expenses and saving/investment money have been safely reserved, you can spend whatever there is left on the things you love. You could buy that dress, purchase that online course, eat in your favorite restaurant, or save for your holiday trip. I am sure I don’t need to give you ideas on how to spend your money, this should be the easiest part for you 😀
The best part about this “pay yourself first” mentality is that you are in total control of your money while still enjoying your life. Don’t just save and forget living, but also don’t just spend it all and regret it later.
So far this strategy has been working really well for me! It helps me set realistic financial goals and encourages me to live frugally.
Do you follow the same strategy? Do you have any great financial tips that you would like to share? Feel free to comment and let me know 🙂
Disclaimer: The information provided in this blog post is for educational purposes only and should not be interpreted as financial advice. The author disclaims responsibility and legal liability (for both authorized and unauthorized users) for any loss, harm, or damage, however caused, resulting from accessing any section of this website. Please consult your financial advisor before making any finance-related decisions.