Pay Yourself First — And Build Your Savings

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Are you investing as much as you should? If not, what can you do about it? Here’s a suggestion: Pay yourself first.

That sounds simple, but it’s not always so easy.

Many people find it hard to invest because they spend all their money on the expenses of daily living. Even when they get salary increases, they find ways to spend this additional money.

Of course, as most of us know, life is pretty expensive.

Yet, if you’re going to achieve your vital financial goals — such as a comfortable retirement — you must save and invest. And the best way to do that is to pay yourself first.

Every single month, put some money away in an investment –– before you pay the mortgage, the utilities and the dentist.

How can you do this? Actually, it may not be as challenging as it sounds. In fact, you may already be paying yourself first, if you have a 401(k) plan where you work.

Every time you get paid, your employer puts some of your salary into your 401(k). You never get a chance to spend this money, because it’s out of your hands.

You can apply this same principle to building up your savings and investment portfolio. Your employer may have a “deduct and invest’’ plan, under which you can have money withheld from your paycheck and placed in an investment of your choice.

Even if no such plan exists, however, you can create one on your own. By setting up what’s known as a bank authorization, you can have money taken from your checking account and placed directly to an investment.

Depending on your situation, you may choose to do this once or twice a month.

You might think that you can afford to put in only small amounts –– so why bother?

But over time, even relatively modest contributions can add up. For example, suppose you have $50 withheld from your paycheck twice a month and placed in a tax-deferred investment –– such as a traditional IRA –– that earns, on average, 8 percent a year. After 30 years, you will have accumulated more than $140,000 –– an amount that can make a big difference in your retirement lifestyle.

Keep in mind that this type of plan won’t assure you a profit and can’t protect you against loss in declining markets. Because you’ll be continually investing in securities regardless of their fluctuating prices, you’ll need to consider your financial ability to keep making purchases through periods of low price levels.

You can accelerate your savings even further by putting part of your salary increases into your monthly investments. Again, you’ve never really had this money in your pocket, so you shouldn’t really “miss” it.

Probably the hardest part of employing a “pay yourself first” strategy is just getting started. If you tell yourself that you’ll begin paying yourself first after you get caught up on your bills, you may never get going –– because there’s always something you can spend money on.

To make this investment strategy work, you simply have to sign that bank authorization and move on. With a little creativity, you should be able to find areas in your budget that you can adjust to compensate for the money now going into your investments.

So, start paying yourself soon –– you’re worth it.

Ross Hage is a licensed financial adviser with the firm of Edward Jones. For more information, call him at (928) 468-2281.

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