How to save for retirement? How many times have you heard the advice to pay yourself first? At face value it may sound ridiculous because how can you pay yourself first when you have financial obligations to take care of?
It seems especially difficult to do so now when people who are employed are either not receiving annual raises or even worse, are getting a reduction in pay. Still, there is a way to pay yourself from each paycheck, and to do so virtually painlessly.
A very good friend once told me, “wealth is the accumulation of small sums.” Okay, you may have heard that before but what’s important to realize, is that the accumulation phase takes time. Therefore, we have to be patient. Get into the habit of saving money without checking to see how much you have each month. Then much later, when you do take a peek at your balance, you may be pleasantly surprised by a large sum. How can this be done realistically?
How to save for retirement?
1) Save at least $50 from every paycheck. Let’s assume for example that each paycheck you bring home is $1,000 after taxes. In most cases people have their pay direct deposited into a checking account. Most banks these days will set up an automatic transfer of funds from your checking account to your savings account – for free. This makes sense for several reasons.
First, you never see it, so you are not tempted to spend it. Using the above example, all you would see is that your paycheck is now $950 and you just work with it. Some may object that they absolutely need those funds. Do we really need that additional $50? When we were children in elementary school we did a lot of pretend games. This is one of those times when that skill comes in handy. Do yourself a favor and pretend that your pay was cut and you can do nothing about it. In reality however, you just began paying yourself.
Secondly, a regular transfer to a savings account is smart because they pay a much higher interest rate than checking accounts. This is where a little homework on your part is very important. Do not be sucked into staying with a bank that has low interest rate accounts just because it seems inconvenient to switch banks. Most banks post their rates online to make shopping easy. Otherwise, the information is just a phone call away. If your hard earned money is going to sit in a savings account, it should be earning the best rate possible.
2) The number one benefit that employers offer and that employees do not take advantage of is not health insurance. It is the matching funds that are offered in a 401k program. Yes, it is true that you cannot use the funds until you are 59 ½ years of age. However, one day you will be face to face with retirement age and you don’t want to leave yourself with nothing to show for it. A lot of employers are offering a 40%, 50%, or even 100% match to what you contribute into a 401k account. That means for every dollar you save, you are getting free money!
Never leave money on the table. Similar to the automatic savings plan we mentioned earlier, the funds are withdrawn before you receive your paycheck, but with an additional advantage that works in your favor. The funds are taken out before income tax is calculated. For example, if your gross paycheck is $1,500.00, but the income tax is 15% ($225.00), then your take home pay is $1,275.00.
However, let’s say you save 5% of that same check into your 401k – $1,500.00 minus $75.00 (5%). That leaves you with a 15% tax on $1,425.00 instead. So the 15% tax is now only $213.75 instead of $225.00. Your take home pay would be $1,211.25. This gives you $11 more than if you saved the $75 on your own outside of the 401k! And don’t forget, your employer may be adding a matching contribution to your 401k as well!
So remember, paying yourself first means being smart about saving money – make it painless! Arrange it in such a way that you never see or feel the loss. You are the most important person you will ever owe. Don’t you owe it to yourself to make sure you have funds to live on in the future or to cover large necessary expenses? Over time you will be the one who gains and you’ll be glad when the accumulation of your small sums turns out to be a sizable amount.