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Pep Talk: Pay Yourself First
Friday, 26th May 2006 (by J.D.)This article is about Basics, Investing, Real-Life
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All the money books tell you to do it. All the personal finance blogs say it, too. Even your dad has given you the same advice:
Save ten percent of everything you earn.
But it’s hard. That money could be used someplace else. You could pay the phone bill, could pay down debt, could buy a new DVD player. You’ve tried once or twice in the past, but it’s so easy to forget. You don’t keep a budget, so when payday rolls around, the money just finds its way elsewhere. You don’t even know where you’d put the money if you did pay yourself first. Just let it sit in checking? Keep it in your savings account? You might like to invest in mutual funds, but you don’t really know where to start.
You’d like to save ten percent of everything you earn, but you just don’t know how to go about.
I hear you. I’m in the same boat. It’s only recently that I’ve begun to save part of my paycheck, and I don’t have a system mastered yet. But I’m working on it. I managed to set aside $400 during the first four months of the year. This month, I managed to save 12% of my first paycheck. I hope to save a similar portion of my next few paychecks.
Here’s how I’ve made the transition:
- I started using my credit unions savings account to build a modest emergency fund.
- I buy stock at Sharebuilder, a discount broker that allows small, regular investments. (Ad: Buy Stocks for $4 at ShareBuilder.
)
- I scheduled $100 to be drawn from my savings account on the third Tuesday of every month. Using the Sharebuilder control panel, it’s easy to designate which stock to purchase.
- Most importantly, I’ve begun to research possible investments. I still find individual stocks attractive, but I’m paying more attention to mutual funds.
I’ve spent a lot of time this week badgering you to start investing for retirement now. For many people, this seems like a pipe dream, I know. But I encourage you to check out Sharebuilder or some other discount broker in order to learn how easy it is to start making small, regular investments.
(Note: Sharebuilder charges $4 per scheduled investment. If, like me, you’re starting with $100 purchases, that’s a 4% fee, which seems rather hefty. I believe it’s more important to actually develop the saving/investing habit, to become comfortable with how it all works, and to worry about reducing or eliminating that fee in the future.)
7 Responses to “Pep Talk: Pay Yourself First”
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May 26th, 2006 at 1:28 pm
I’ve been in the “pay yourself first” habit for the past five years or so. It is, by far, the best way to save for retirement (or any other financial goal).
My setup is really simple. I get paid every two weeks via direct deposit. I have automatic mutual funds contributions deducted from my bank account on the same day as my payday. Every two weeks, the money’s deposited to my retirement account. I use what’s left in my bank account to pay for the essentials (bills, groceries, etc) and then whatever is left after that is “fun money”.
The nice thing about this system is that it doesn’t require any active steps on my part every two weeks - the retirement account contributions simply happen.
May 26th, 2006 at 9:49 pm
As long as we’re on the subject of oft-repeated financial advice, I’ll toss in a chestnut that comes up repeatedly in The Millionaire Next Door: The amount of time you spend thinking about financial decisions is directly proportional to the degree of wealth you build. The point being, sometimes it can be overwhelming to think about taking the first step — when in fact you’ve already taken that first step, by coming here and reading this blog.
May 29th, 2006 at 9:55 am
One more point to add to this: get as much money out of your paycheck pre-tax as possible. Taking savings out pre-tax is double-plus-good: not only are you saving, you are reducing your taxable income!
June 1st, 2006 at 7:46 am
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June 12th, 2006 at 6:15 am
[...] Pep Talk: Pay Yourself First: Get Rich Slowly encourages readers to save ten percent of everything they earn. [...]
March 26th, 2007 at 9:24 am
Nice blog, good reasonable and straight forward information.
I struggle with saving & budgeting just like anyone else. I usually try to save a penny here and there. I understand that all financial institutions has some sort of fee but ShareBuilders $4 fee for automatic deposits seems unreasonable. That’s $48 for the full year. I’m all for getting int the habit. I understand that there is a lot of discipline involved but I would suggest just simply saving or use automatic deposits from companies that don’t charge you a fee to save. I just read your recent post about low-yield online savings accounts and found my way towards this old post. ING and Emigrant does not charge for automatic deposits.
October 11th, 2008 at 5:08 pm
Isn’t it amazing how much we can learn from our parent, theirs too and even our long lost ancestors. I’ve been thinking about this recently and have just written a post about it - “Pay Yourself First” and other Ideals we have Recently Lost.
Hope you enjoy it since you have given me much enjoyment and knowledge through your site. I hope it can be considered a favour in return like the way things used to be