You know you need to save for retirement, but it’s not always easy. Even those free of debt find it difficult to save. Many people spend all their money each month, and they can’t (or won’t) change their spending habits. If that describes you, the following strategies can help.
Pay Yourself First
Perhaps your life is governed by two immutable facts. Fact: You spend all your money every month, leaving you with nothing left to save. Fact: You can’t change the first fact.
So, let’s make a subtle change in how you pay your bills. Currently your paycheck gets deposited directly into your checking account, and then you start writing checks. If you’re like most people, you pay the rent or mortgage first, then car payments and other loans, followed by your cell phone bill and utilities. You save the credit cards (if any) for last, because the amount you pay them is directly related to how much you have left after you’ve paid your other bills.
So you send minimal amounts to each credit card company, and by the time you’re done, your checkbook balance is at or near zero. And while you promised yourself that you’d save some money this month (as you promise yourself every month), you now discover (as always) that there’s nothing left to save. In fact, you barely had enough to pay the bills themselves.
Without realizing it, you are treating yourself as a creditor — albeit a benign creditor. You want to pay this person named Yourself, but you know you’ll never get hassled by Yourself, so it’s okay to miss a few payments — or even ignore Yourself altogether.
Thus you pay Yourself last each month, which all too often translates into not paying Yourself at all.
To fix this, you must pay Yourself first — before you pay any other bills.
So, here’s my challenge to you. For one year, I want you to write Yourself a check before you pay any other bills. This way you can be certain that you will have paid Yourself before you run out of money.
Aim to save 10% of what you make per year. Here’s a simple trick:
- Take your yearly income — let’s say it’s $50,000
- Drop the last zero: $5,000
- Divide by 12: $416
This is the amount you write on the check. Each month put that $416 (or whatever amount you calculated based on your income) into a savings account, mutual fund, or exchange-traded fund. That’s it. Now you can pay the rest of your bills as you normally would. And if you’re concerned you will run out of money, don’t fret because you’re going to run out of money anyway (you always do, right?). At least this way, you’ll never run out of money until after you’ve paid Yourself first. And that’s the point.
Make Paying Yourself First Even Easier
Although there’s a therapeutic psychology behind the physical act of writing checks that can be very motivating, for some it might be one more chore to add to the list — and ignore. You can make paying yourself first even easier by making it automatic. One of the greatest features of a 401(k) or other employer retirement plan is that your monthly saving happens automatically — no check to write and temptations don’t get in the way. Just contact your company’s human resources department and let them know how much you want to contribute from each paycheck. By voluntarily having a small portion of your paycheck sent to the plan, you won’t ever see the money — and what you don’t see, you won’t miss.
Stay Motivated – Go Window Shopping For Your Future
What’s the best way to stay motivated when you find yourself struggling to stay on track with your monthly commitment to save? Go window shopping – for your future.
When you can see, touch, and feel what you’re saving for, you’re more likely to stay focused on the goal, and more likely to stop other spending. Here’s what I mean: You’re saving to buy your dream home. So, tour open houses in your favorite neighborhoods. Or perhaps a family vacation is in your future. Start researching airfare, hotels, and all the activities you’ll want to experience while you’re there.
Doing this will keep you inspired. When you’re inspired, you’re much more likely to stay motivated to spend less on the needless things that bring you instant gratification and instead save more for the things and experiences in life that you really want. Soon enough your goals and dreams for the future will become reality. Good luck and happy saving!
Ric Edelman, Chairman and CEO of Edelman Financial Services LLC, a Registered Investment Advisor, is an Investment Advisor Representative who offers advisory services through EFS and is a Registered Principal of and offers securities through SMH. Advisory services offered through Edelman Financial Services LLC. Securities offered through Sanders Morris Harris LLC, an affiliated broker/dealer, member FINRA/SIPC. For more information, visit www.ricedelman.com. Connect with Ric on LinkedIn or on Facebook at www.facebook.com/RicEdelman. Follow him on Twitter at @RicEdelman.