Last week, I posted an article called, Five Smart Steps to Taking Control of Your Finances, and today, I want to go deep on Step #1: Pay Yourself First. We all have heard this statement, but what does it really mean AND how important is it?
Let’s look at some numbers:
In a June 2008 Associated Press survey, it was reported that:
- 78 million baby boomers are approaching retirement and that 66 percent –of these individuals expect to continue working after “retiring” to supplement their pensions, Social Security and savings.
- In a recent Gallop Poll – that number is now up to 80%
- Just 59% of workers are currently saving for retirement and one‐half of them have less than $25,000 tucked away, according to the survey.
How much do you think you will need for retirement?
This part is best left to a professional like a financial planner or a CPA since they have access to computer software that can calculate inflation to give you the future values of your needs over time. There are also Retirement Calculators that can give you a general idea like these on my CPAs website.
However, if you are not working with a financial adviser, I suggest that you spend some time getting a clear picture of your current financial situation. I have created a 33 page ebook that will help you do just that and it’s available to you for FREE as part of my Smart Women Success System.
What you want to do is to complete the worksheets and calculate what you own, what you owe (your Net Worth), plus what you spend and what you earn (your Cash Flow). The goal is to identify what you will have coming in at retirement vs. what you will need.
If there is a shortage, then you will either need to save more, work longer, get a higher return, or supplement with post retirement income. I also talk about this in the Prosperity System when I talk about The New Retirement Solution.
If you are looking for one on one help, please schedule a 30 minute complementary Money Breakthrough Method Consultation with me at www.talkwithkatana.com I am only offering these for a limited time, but right now, you are welcome!
How should you Pay Yourself First?
The smartest way to do this is to be saving in at least two pots — one for your Emergency Fund and one for your Retirement. Let’s talk about each and let’s start with your retirement plan:
- Most of us have access to some sort of “pretax retirement plan” through our employer. If we are self employed, we can set up a SEP IRA or simply an IRA or Individual Retirement Account.
- If you are employed, simply make sure that your employer is taking the MAX out of your paycheck each week and investing it into your retirement plan at work. You will have the responsibility to select how the money is to be invested and will want to get some advise if you aren’t familiar with investments.
- If you cannot invest the maximum, then consider starting somewhere, even if it is just $25 per week. But start now. Below, you will see the power of compound interest over time. The earlier you begin investing, the more you benefit from compounding interest. At one point, your investment will be making much more money from compounding than you can even add yourself. Isn’t this exciting!
Check out this chart showing how much you need to save to have $1 million by age 65 at an annual rate of 10%? As you can see, the secret is starting early. AND its never too late, you just need to save more or save longer!
Age Daily Savings Yearly Savings
20 $4.00 $1,460
30 $11.00 $4,015
40 $30.00 $10,950
50 $95.00 $34,675
Now let’s talk about creating an Emergency Fund:
- The next time you get your paycheck, go to the bank and set up a “Savings Account”. Before you deposit your paycheck, take 10% or a specific dollar amount, even if it just $10 and deposit into your savings.
- Now, here is the Secret: Every single paycheck, you will put this same dollar amount into your Emergency Fund (savings account). You will do this automatically and preferably “electronically”, so you don’t even see it.
- Continue to do this, even if you are paying down credit cards. (this will be addressed in a separate article)
For the Self Employed:
You probably get paid in chunks of money, at various times, and in uneven amounts. In fact, there are times when you get large amounts, and then times when you have no income coming in.
Here is the secret for YOU: Stop Being A Cash Cow! What this means is spending MORE when you have a BIG balance in your account. The most important thing you can do is discipline yourself with these three steps:
- Treat Your Business Like a Business and PLEASE make sure you have a Separate Bank Account for your Business.
- Put yourself on the payroll with a specific paycheck, just like everyone else. And actually write yourself a paycheck and deposit it to your personal account. Remember, you will then set aside your “specific amount” for personal savings!
- Now cut TWO MORE checks (or electronic transfers)
- Deposit this into your SEP IRA for your retirement.
- Deposit the second one into a Savings Account to pay your Estimated Tax Payment to the IRS.
The secret here is to keep a running cash reserve in your business checking account or savings account, so you can sleep at night. In addition, it is important to have a business line of credit to help you through the dry spells, even if it is from your credit card. I have a $50,000 line of credit at the bank at 6%, and even though it doesn’t have a balance, I will keep that account available for emergencies, as long as I have my business.
So I hope this has been helpful. Whether you are just starting out with your savings plan, or have built up a large nest egg, paying yourself first is a Smart Foundation to creating a life of Financial Freedom.
If you haven’t done so yet, be sure to pick up your FREE Smart Women’s Prosperity System and print out your copy of my signature 33 page Financial Organizer Planner eBook. And be sure to share it with your friends! My dream is to help thousands of women around the globe live with Awakened Prosperity – a life of health, wealth and happiness!
By Katana Abbott, CFP, CSA
Founder and Prosperity Coach
Smart Women’s Prosperity Institute™
Creating Wealth While Making A Difference!