Each month you settle down to pay bills. You pay your mortgage lender. You pay the electric company. You pay the trash collector. But do you pay yourself? One of the most basic tenets of sound investing involves the simple habit of “paying yourself first,” in other words, making the first payment of each month into your savings account.
Americans’ saving patterns vary widely. And too often, short-term economic trends can interrupt long-term savings programs. For example, the U.S. Personal Savings Rate jumped from 3.5% to nearly 8% in May 2008 during the housing and banking crisis. It then rose and fell sporadically as the economic environment appeared to stabilize.1
The Genius of Pay Yourself First
Anyone who’s ever managed their own finances knows that saving can be a challenge. There seems to be an endless stream of expenses that demand a piece of each month’s paycheck. Herein lies the genius of paying yourself first: you get the cream at the top of the bucket, and not the leftovers at the bottom.
The trick is to prioritize. Make it a point to put your future first. At first, saving may mean a small lifestyle change. But most individuals want to see their net worth increase steadily. For them, finding ways to save becomes more of a long-term commitment than a short-term challenge.
There are also tricks to help you prevent from over spending when you can’t seem to stay consistently with in your budget. Try living off of last month’s income. Withdrawing cash on Sunday what you are willing to spend on food each week to prevent over spending. Be aware of where your money is going.
Putting Your Money to Work
What will you do with the money you save?
If retirement is your priority, consider taking advantage of tax-advantaged investments. Employer-sponsored retirement plans, such as 401(k)s and 403(b)s, can be a great way to save because the money comes out of your paycheck before you even see it. Even if you work for yourself, these accounts are available for you. Also, as an added incentive, some employers offer to match a percentage of your contributions.2
For money you may want to access before retirement, consider placing the funds in a separate account. When the balance hits your target, you may want to move the money into investments that offer the potential for higher returns. Of course, this may mean exposing your money to more volatility, so you’ll want to choose vehicles that fit your risk tolerance, time horizon, and long-term goals.
In the pursuit of growing wealth, sound habits can be your most valuable asset. Develop the habit of “paying yourself first” today. The sooner you begin, the more potential your savings may have to grow.
Ups and Downs
The U.S. Personal Savings Rate historically has fluctuated as Americans are influenced by the short-term economic environment.
Sources: Bureau of Economic Analysis, 2014, for the period July 1, 2005 through July 1, 2014. National Bureau of Economic Research, 2014
1. Bureau of Economic Analysis, August 2014
2. Distributions from 401(k), 403(b) and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG, LLC, to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Copyright 2015 FMG Suite. Securities and advisory services offered through National Planning Corporation.(NPC) Member FINRA, SIPC, and a Registered Investment Advisor. Trilogy Financial Services and NPC are separate and unrelated Entities.
About Your Columnist
Windus Fernandez Brinkkord is a featured columnist for Women Taking Charge, the official blog of Connected Women of Influence, where she covers the intersection of women in business and managing their investments and taking charge of their financial future. Currently, Windus is Senior Vice President of Investments with Trilogy Financial Services, a financial services company that focuses on helping business owners and individuals build and manage wealth.