By Shawndi Purselley, CFP®, CDFA®
As I’ve mentioned before, I lived most of my adolescence with my grandparents. My grandfather Glen only had a 5th grade education. However, he managed to own and run his own air conditioning and heating business. We weren’t well off by any means, but we survived. Even though my grandparents didn’t save well for their retirement years, Glen did teach me a fundamental lesson about saving money. Like most of us, I was encouraged to do chores around the house to earn money. I was able to earn up to $7 a week as an allowance. However, in order to continue to get the allowance, Glen required me to save $2 out of each $7. I had a separate box I kept under my bed for this “savings account.” He taped a piece of paper to the top of it and each week when I placed the $2 in the box, I had to write down the date, amount and keep a running total of the amount of money in the box. At the end of the year, he would allow me to spend the money. I would use the saved allowance for purchasing Christmas presents for my family at the Santa’s Workshop event at school. I looked forward to it all year long. What I didn’t understand at the time is that he was teaching me the self-discipline to “pay myself first.”
Paying yourself first is simply setting income aside before you spend money on anything else. We all know how important it is to save for future needs. Sometimes though we foolishly believe we have time to start saving later. Most of us have been taught to pay bills and cover household expenses first and to only save what is left over. Saving shouldn’t be an afterthought. Saving for retirement needs to be more like a calculated plan of attack! Typically, along with a budget I suggest that clients determine how much of their income should be sent to each of their long-term buckets. These buckets include things such as, emergency funds, future home purchase, college tuition, and retirement. Then, as income comes in, the appropriate portion goes to the correct bucket. Afterwards, bills and other expenses are paid.
How to Pay Yourself first:
I have learned through the 20+ years I have been in the financial services profession that the best way to pay yourself first is through automatic investment plans and/or bank transfers. I recommend that these transactions occur as soon as the income is paid.
As an example, your 401(k) plan is a “pay yourself first” savings plan. These contributions are removed from your paycheck before you ever get your pay. Additionally, some employers will allow for your income to be direct deposited into more than one bank account. In the past, I have instructed my employer to deposit a set dollar amount of each paycheck into a savings account at my bank, and the difference paid directly to my checking account for bills and other expenses. If your employer is not able to separate your income, most banks allow for automatic transfers from one bank account to another. This transfer will allow you to schedule an automatic monthly reoccurring move of funds from checking to savings.
Budgeting to Save:
Grandpa Glen took things a step further; each year before Santa’s workshop, he suggested I make a list of the people I wanted to buy for and allocate a budget for each person’s gift. He made me make the list to ensure I had enough money in my box to buy for the people I wanted to buy for. This activity also reminded me not to overspend on any one person.
If you are having a hard time determining how much you should be saving, come sit down and talk to me and we can figure it out together. We can take a look at your current needs and future goals and work backwards to find the right amount for you.
*Distributions from traditional employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.