You have credit card payments, student loan payments, rent, mortgage, car payments, utilities, groceries, etc. and a good gym membership vying for that precious budget. It’s very easy Neglecting savings.
This article explains why it’s important to save every month. How do we do it? First, by paying for it yourself. That’s right, before all the other bills. Don’t worry. If you do this correctly, the light will never go out.
I’ve heard this when consulting with family finances, I’ve had friends say it in casual conversations, and the data shows that their comments are true. .”
When I hear this, I think about the death of savings accounts, the death of retirement, and the death of financial freedom itself. And I’m not a big fan of death for those things, so let’s improve on this? Okay, great. That’s the deal.
Let’s start with the numbers
In a survey of approximately 7,000 Americans, 69% Those who reported a savings account balance of less than $1,000 (GOBanking Interest Rate). 38% say it’s worse than that I have no savings at all! Yes, it’s $0. The study also cited “…living beyond your means…” as a possible reason for the lack of savings.
In any case, the above paragraph only talks about savings accounts. Even bringing up the topic of “retirement” makes me tremble…huh. Let’s find out what it is.
same company, different Survey, similar results:
33% of Americans have zero retirement savings (2016). I’m shaking my head…not violently, but with a clear purpose…let’s continue. Here are some quick takeaways from the data:
- Women are more likely than men to have no retirement savings.
- Three out of five Millennials have started a retirement fund (good job to us).
- But for seniors, thank God, retirement savings are closely correlated with age. In other words, the older you are, the more likely you are to be able to save more money.
Even if we are grateful to our wise elders, that doesn’t mean we can’t try to close the gap.
I know that saving money from a young age may not seem like a very urgent task. Retirement is decades away, and you may or may not have a family, home, kids, etc…but don’t fall for that hype. I would argue that once you’ve cleared your bad debts, there’s nothing more urgent than saving money in some way.
Why is it so important to save now? Because there is no substitute for time when it comes to earning interest. Example (assuming a 5% return):
- If you start saving a modest $100 per month starting at age 35, you can expect to have $83,712 by the time you retire (age 65)
- If you start at age 30, that’s $113,803. (Please note that I only contributed an additional $6,000 to get the maximum difference of $30,000)
- If you have a great mentor and start saving $100 at age 18…you’ll reach age 65 with an account balance of $224,430. Remember, it starts at $100 per month!! Compared to 30 years of savings, you can earn even more in 47 years. $141,000 at the price of $20,000 With additional donations.
There’s really no substitute time Regarding investment. Now that you know that saving money is your top priority, how can you make it happen?
What to do to start paying yourself first
1) Decide on your goals
Are you saving money to establish an emergency fund? Or maybe you’re saving up for a down payment on your first home?
Is it retirement, peace of mind, or just because you think it’s wise? Either way, now is the time to identify your goals. If you don’t know where you are going, it will be very difficult to get there.
Additionally, it is important to determine how much money you need for each of these goals. For example, you want to eliminate the possibility of your savings being left in limbo as you go back and forth between saving $1,000 and saving $2,000 for your emergency fund. Knowing exactly the total amount allows you to create a specific savings plan with a limited end date.
Another possibility is that you want to save for multiple reasons. For example, consider vacations and down payments. While you can ultimately achieve both goals if you follow the steps above, I have found that those who prioritize and execute are more successful and achieve their goals more efficiently.
That means instead of splitting your monthly savings between two accounts, choose the funds that are most pressing and hit that goal first. If you want to go on vacation before purchasing a new home, replenish your vacation fund before thinking about the down payment. Once you’ve saved up your vacation funds, cross it off your list and move on to the next goal.
Once you have identified your goals, move on to step two.
2) Establish a specific account – multiple accounts
Options include savings accounts, brokerage accounts, bonds, supplemental checking accounts, retirement accounts, and more. The important thing is that you have options. Depending on the goals you have decided on, there are several accounts that are more suitable for you. .
For example, if you’re saving for retirement, you won’t focus on accounts that provide liquidity (for example, you won’t have immediate access to cash). These account types include IRAs, 401k, 503b, and more.
Many of these only allow penalty-free withdrawals once you reach retirement age. If retirement is your goal, that’s for you. Because you don’t have immediate access, you won’t be tempted to dip into your retirement savings on a whim.
Additionally, these funds give you access to many listed stocks and other funds with the potential to earn moderate to high rates of return (of course, this type of savings comes with risks. Please consult us).
Whether you’re saving for an emergency fund, vacation, down payment, or other short-term event, you need instant access to cash when an emergency arises or when it’s time to pay.
For this, we recommend a high-yield savings account or a personal brokerage account. A savings account should offer a rate of return close to 1%, which is likely better than a checking account or mattress, and a brokerage account gives you access to the market and all its products (funds). can.
Choose your investments wisely and be able to sell your funds or transfer cash when you need to.
All of these accounts can be set up online or over the phone and don’t take long. Just make sure you do your homework and invest in a reputable company that won’t waste you and your cash.
3) Set up automatic forwarding
Here’s how to actually do it first pay yourself. My wife and I both have our paychecks deposited directly into our checking accounts, so we set up automatic transfers into separate accounts each payday. That way, you don’t have to think about it, worry about remembering it, consider cutting back on transfers this week, or otherwise veer off course.
Returning to the emergency fund example from Step 1, let’s say you decide to put away $1,500 split down the middle so you can sleep at night. I’m writing this article on January 18th, but let’s say your goal date is June 1st. This means you have about 4.5 months or 19 weeks to save. If you receive a paycheck every other week, that’s 9 paychecks. A simple division reveals that to ensure you save $1,500 by the beginning of June, you need to save $167 per check.
Now that you know what you need, you can set up an automatic transfer of $167 to your new account every payday. Because paying yourself first means Pay yourself first This means that you are not considering how this savings will affect your budget. They decide how much they need and make it happen. Once that’s done, move on to the fourth and final step.
4) Assess and control budget impact
This will put you in damage control mode.
Saving (insert your reason here) is a priority you have decided to focus on, so there is no need to feel bad about putting that money aside. People in this country are unprepared for emergencies, retirement, and random life events because they don’t make saving a priority. By paying yourself first, you’re prioritizing your savings, which can take a toll on other areas of your financial life.
However, this doesn’t have to be the case. Saving money doesn’t mean you don’t have to go buy ice cream for the kids, it just means it’s time to get creative. My wife and I were able to save $200 a month on our regular expenses by just making a few phone calls and asking some awkward questions.
If you take a hard look at your budget and spending habits, there’s a good chance there are some things you can cut back on. Remember that you are making sacrifices in the short term for long term stability and wealth.
Finally, it feels powerful to prioritize the stability of you and your family.
We’ve seen that working together and paying for yourself first teaches you to live on less than you earn as if it were the real norm. Struggling from paycheck to paycheck can be demoralizing at times. But if you practice financial discipline and make saving a priority, your sacrifices will soon start to pay off.
