Financial Tip #5: PAY YOURSELF FIRST!
As Americans strive to pay their monthly bills in these challenging economic times, many find themselves with either no money left over or fighting the impulse to spend any surplus cash. Succeeding financially depends on a disciplined savings plan and that includes the key strategy of paying ourselves first.
“The best savings plan is an automatic savings plan,” said Kevin Reardon, CFP®, President of Shakespeare Wealth Management, Inc. in Brookfield. “On a set day(s) every month, money is automatically withdrawn from your savings or checking account and is deposited into investment or retirement accounts, such as 401ks and 403bs. When money is withdrawn automatically from our paychecks, we adjust our lifestyle to meet our net-income (income after taxes and savings).”
Reardon suggests that, before paying your mortgage, utility bill, property taxes, income taxes, dental bill, or other expenses, pay yourself first. This discipline helps meet your savings goals and reduces your spending patterns to match your remaining income. “Many of us justify a given purchase by saying that we ‘have the money to pay for it,’ when, in reality, much of the money sitting in our checking account should have been allocated to our savings/investment plan,” added Reardon.
With the demise of traditional pension plans and the uncertainty surrounding social security, individuals must take more responsibility over their finances than previous generations who could rely on those programs. Reardon believes that a 10% overall savings goal (401k + non-taxable savings) is too low for today's workers. Instead, he recommends a 20% savings rate, especially for younger people or more seasoned savers trying to play catch-up.
Reardon suggests that you pay yourself first for the following:
• Retirement plans (401ks, etc.) - You know when you would like to retire or be forced to, so start saving.
• Health Savings Accounts – These pay for current and future health expenses.
• New Home Purchase - If this is a future goal, save for it now.
• College Education - Monthly 529 college savings plans help you prepare for that day your child turns 18 and wants to go to college.
• New Car Purchase – No car lasts forever. Start saving for a newer one.
• Home Fixes - Roofs, furnaces, water heaters, etc. have a limited life. If your roof is 25 years old, you know you'll need a new one sooner than later.
• Christmas - If you want to purchase $600 in Christmas gifts, then save $50 month.
• Vacation - Don’t dream of your next vacation. Plan for it!
• Emergency Fund – We all face unexpected expenses, job loss, etc. during our lifetimes, Build up an emergency fund now, beginning with a monthly contribution/automatic savings plan.
“Savings MUST be automatic because, if the money doesn't come out automatically, even the most disciplined saver and investor can find reasons to miss a savings payment,” said Reardon. “If you plan to write a check to your investment account on the first of every month, how likely are you to write that check on January 1st, when your property tax bill is due and your Christmas credit card bill is due in a few days? It must, must, must be automatic!”
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