Welcome to the second article of my series. This article is about paying yourself first. You could probably find hundreds of articles on the internet about this very topic. It is a common theory used by many financial advisors. It is an important theory that is worth discussing.
The reasons for paying yourself first are easy to figure out, you get to build a savings account, you get in the habit of saving, you build your emergency fund, and more. In my opinion, the most important reason to pay yourself first is to force yourself to live below your means.
If you get in the habit of saving a percentage of your check every week, or whenever you happen to get paid, you will be on a good path. Of course, don’t put 10% of your check in the bank and then go spend $2000 on a credit card, that defeats the purpose. Anyone that reads about personal finance probably knows the average American not only has no savings account but they have a negative savings. That simply means they spend more than they make. If they got injured and were out of work they’d have trouble paying their bills for one month, never mind more. The average credit card debt in a household is nearing $10,000. The combination of no savings and increasing credit card debt is financial suicide.
When I used to work in an office people would come to me to discuss finances on occasion. Maybe they needed a new car and wanted to know if they should lease or buy, maybe they had questions about how to invest their 401(k) dollars. There were a number of reasons. But, we always got on the topic of their 401(k) regardless of the initial reason they came to me. I still can’t believe how many people were not putting any money in their 401(k) or were putting the amount the company automatically set up for them, 3%. They had no idea what they were invested in, some didn’t even know how to log into check their account and find out.
I would ask them how they didn’t know these things or why they weren’t putting in at least the 7% the company matched. Their response, “I can’t afford it. ” I would then explain it didn’t really change their check much because it was pre-tax, etc… The sad part is, if they couldn’t afford putting money in their 401(k) you knew they weren’t saving any money on their own. These people all made over $40,000 a year, most were above $50,000. They were not even paying themselves via their retirement savings.
I wonder what they will do in 30 years when they have a fraction of the retirement savings they could have had. The real question is, can they (or you) afford NOT TO save? If you live your life pay check to pay check when will you ever be able to retire? There will always be a nicer car to buy, a bigger house, better clothes, and fancier vacations. At some point you need to draw the line because if you don’t you’ll have a massive mortgage payment when you hit 65 and you will never be able to afford to retire. After all, you hardly saved any money for your retirement while you were spending all this money.
If you are one of these people that spend every penny you have then at least buy yourself an annuity. You can make monthly payments to it and when you retire you will at least have a guaranteed income for as long as you live. Unless you are over fifty years old you can’t even count on Social Security anymore.
Scott Bianchi is an independent insurance agent that specializes in protecting people's present financial situation while helping them prepare for a comfortable retirement. He runs a web site on personal finance offering many resources and important products as well. He can be reached at email@example.com .