Throwin Darts
WKR
- Joined
- Feb 2, 2020
- Messages
- 328
The most important thing I've ever done with my finances was adopting the idea of "paying yourself first". Most people operate by getting their paycheck, paying all their bills, and then if there is anything left over they save. This rarely works. There will always be bills and there are always going to be more things you want to buy, which more times than not will leave you will no money left at the end to save. People work hard for their money and then pay everyone else for that hard work but themselves. That's messed up. Think about how Uncle Sam gets paid on your paycheck. He takes his cut and then gives you what's left. That's how you need to pay yourself. Pay money towards your savings goals and then live on what’s left, not the other way around. It is painful at first but if you are always paying yourself first and having to live on what’s left you eventually adjust your spending. This WILL NOT work if you still leave human nature to complete the process. In the world of online banking you need to protect yourself from yourself. Set up an automatic transfer from your checking account to an online savings account at a different bank and have it transfer money automatically on payday before you ever get a chance to spend it. Notice I said at a different bank than your checking account. This is another way to protect yourself from yourself. If it’s at the same bank it is an instantaneous click away from being in your checking account so put it somewhere else. Look at Ally or a similar online savings bank. So pay yourself first and make it automatic.
Now where do you put your savings once you are paying yourself first and making it automatic? I think of it in buckets. Once one bucket is full, move on to the next bucket. Here is how I rank my buckets.
1. Emergency funds (6-12 months of expenses. Be honest with yourself here on what a months’ worth of expenses really amounts to)
2. 401k up to the match, if your employer provides a match (this is free money from your employer. Skipping it is like saying you’ll do the same amount of work for less pay. If your employer offers a match on 6% by God contribute 6%)
3. Roth IRA up to the IRS annual limit, if you are eligible based on income ($7,000/year. $8,000 if you are over 50)
4. 401k on top of the employer match, up to the IRS limit. $23,000/year, $30,500 if you’re over 50
5. Taxable investments (stocks, bonds, etc. outside of IRAs and 401k)
So get your emergency fund up to a comfortable balance. Then contribute to your 401k up to the Company match. Once you adjust to that then start contributing each paycheck to a Roth and make it automatic. Once you adjust to that then bump up your 401k contribution above and beyond your Company match and hopefully get it up to the IRS limit. Once you do that you can start contributing to taxable investments. IMO if you want to retire early it’s the taxable investment bucket (#5) that allows you to do so. Make it all automatic.
Tons of people don’t contribute to an IRA or a 401k. I think of it like this. If I work 40 years then the IRS allows me 40 chances to contribute to these investment vehicles and gain the benefit of their tax treatment. If I miss a year then I never get it back. Ever. If you don't like paying taxes, and I’m sure you don't, don’t let a year go by without getting as much as this benefit as possible because you never get that opportunity again.
So this covers saving for retirement but what about saving for big purchases. Online savings accounts allow you to create sub accounts all under one user. You can open an Ally bank account and then create sub accounts for things like 1) hunting 2) car insurance 3) new vehicle purchase, 4) Christmas etc. If you have a big expense coming up, create an account for it and start saving for it over time and make it automatic. Think about escrowing for property taxes. The bank makes you pay in each month and then cuts a check on your behalf when the bill comes due. This is the same thing. If your car insurance is coming due in 6 months and you’re getting paid 12 times in the next 6 months then take the cost of that car insurance, divide it by 12, and set up an automatic transfer to your savings account set up for car insurance so that when the bill comes the cash is sitting there. Do this for any big expense. People get behind on savings when they have a paycheck wiped out by some big expense. This fixes that, every paycheck should be the same as the last.
Change your mind set on earnings. How much you make at work is irrelevant if you spend it all. You’re not making yourself money, you’re making everyone else money (car companies, retailers, Cabelas, etc). Focus on savings because it’s not what you earn for everyone else that matters it’s what you earn for yourself. IMO to stay focused you need to record how much you save because seeing progress creates more progress. Think of it like a woman trying to lose weight. How often do they step on the scale? All the time. As you are saving, create an excel spreadsheet and record your financial assets, your liabilities. The difference between the two is your net worth. Record it every day if you must to stay focused.
That was my long winded response to pay yourself first and make it automatic.
Now where do you put your savings once you are paying yourself first and making it automatic? I think of it in buckets. Once one bucket is full, move on to the next bucket. Here is how I rank my buckets.
1. Emergency funds (6-12 months of expenses. Be honest with yourself here on what a months’ worth of expenses really amounts to)
2. 401k up to the match, if your employer provides a match (this is free money from your employer. Skipping it is like saying you’ll do the same amount of work for less pay. If your employer offers a match on 6% by God contribute 6%)
3. Roth IRA up to the IRS annual limit, if you are eligible based on income ($7,000/year. $8,000 if you are over 50)
4. 401k on top of the employer match, up to the IRS limit. $23,000/year, $30,500 if you’re over 50
5. Taxable investments (stocks, bonds, etc. outside of IRAs and 401k)
So get your emergency fund up to a comfortable balance. Then contribute to your 401k up to the Company match. Once you adjust to that then start contributing each paycheck to a Roth and make it automatic. Once you adjust to that then bump up your 401k contribution above and beyond your Company match and hopefully get it up to the IRS limit. Once you do that you can start contributing to taxable investments. IMO if you want to retire early it’s the taxable investment bucket (#5) that allows you to do so. Make it all automatic.
Tons of people don’t contribute to an IRA or a 401k. I think of it like this. If I work 40 years then the IRS allows me 40 chances to contribute to these investment vehicles and gain the benefit of their tax treatment. If I miss a year then I never get it back. Ever. If you don't like paying taxes, and I’m sure you don't, don’t let a year go by without getting as much as this benefit as possible because you never get that opportunity again.
So this covers saving for retirement but what about saving for big purchases. Online savings accounts allow you to create sub accounts all under one user. You can open an Ally bank account and then create sub accounts for things like 1) hunting 2) car insurance 3) new vehicle purchase, 4) Christmas etc. If you have a big expense coming up, create an account for it and start saving for it over time and make it automatic. Think about escrowing for property taxes. The bank makes you pay in each month and then cuts a check on your behalf when the bill comes due. This is the same thing. If your car insurance is coming due in 6 months and you’re getting paid 12 times in the next 6 months then take the cost of that car insurance, divide it by 12, and set up an automatic transfer to your savings account set up for car insurance so that when the bill comes the cash is sitting there. Do this for any big expense. People get behind on savings when they have a paycheck wiped out by some big expense. This fixes that, every paycheck should be the same as the last.
Change your mind set on earnings. How much you make at work is irrelevant if you spend it all. You’re not making yourself money, you’re making everyone else money (car companies, retailers, Cabelas, etc). Focus on savings because it’s not what you earn for everyone else that matters it’s what you earn for yourself. IMO to stay focused you need to record how much you save because seeing progress creates more progress. Think of it like a woman trying to lose weight. How often do they step on the scale? All the time. As you are saving, create an excel spreadsheet and record your financial assets, your liabilities. The difference between the two is your net worth. Record it every day if you must to stay focused.
That was my long winded response to pay yourself first and make it automatic.
