One Caveman’s Financial Journey

Last week, I wrote about my huge mistake of not saving right out of college. I made a decent income, but by spending it all, I was left with nothing in my savings when I lost my job. I thought I could have it all. In reality, I had nothing at all besides debts to be paid.

Many people approach saving as a method to store what is left over after each paycheck. This may work if you’re an automaton that faithfully sticks to your budgets, but most humans will find a way of spending all or nearly everything they make if they leave it in their spending account. I know I’m like this. If I know I have money available, I’m a little looser with my spending. But by paying yourself first, you actively remove this money from your spending account, making it impossible for you to overspend.

But what does “paying yourself first” really mean? It means prioritizing yourself and your future above all other competing demands. It means taking money out of your paycheck before it has a chance to be spent on bills, food, or any other part of your life. In essence, you become a line item in your budget that is paid before all others.

Paying yourself first is a great idea, but it can be a difficult thing to start. After years of minding your bills and making your debt your master, it is really hard to flip that mindset around. Starting saving is difficult, but it gets easier each time you do it until it becomes a natural habit. Before I started my current job, I still didn’t think much about savings or retirement, but I knew I needed to do something. Many people will encourage you to immediately save at least 10% of what you earn and that’s a good benchmark to aim for, but not necessarily the friendliest number to start with.

Your goal here is to start paying yourself first, not to overwhelm yourself with thoughts that you aren’t saving enough. Figure out how much you saved over the course of the last month (it’s ok if you didn’t save anything). Now take that number and add $50 to it - that is your your new self-salary. Divide that amount by the number of paychecks you receive in a month and that is how much you have to pay yourself out of each paycheck.

Do that for a couple of months and see how it feels. Once that amount starts feeling comfortable, it means you’ve adjusted your lifestyle to the new level of savings. It also means it’s time to bump it up again. Treat saving like a workout plan where you never settle for only doing just what you did last time. If 10 push-ups feel easy, you aren’t gaining anything by just doing 10 every day. Likewise, if $50 a month is easy, it could be a sign that you have room to save more.

The idea here is to move money from your spending account into your savings each time your paycheck arrives. You can choose to move that money on your own, but you’re more likely to succeed if you never see that money to begin with. As David Bach taught in, The Automatic Millionaire, the key to a successful saving plan is to make it automatic. There are some easy ways of accomplishing that:

• Sign up for a 401(k):
  • In the four years I’ve been with my current employer, I’ve increased my withholdings three times and now I’m up to 6%. That means before taxes come out and before any money is deposited into my checking, 6% of my salary is taken out an saved on my behalf in a 401(k). It’s great watching that balance rise. What’s greater is that my employer matches half of what I withhold, up to 6% of my salary. Because of this, I’m essentially saving 9% of my salary to ensure I have an outstanding retirement. If your company offers a match and you don’t take it, you’re leaving free money on the table.
• Sign up for a high-interest savings account and set up automatic transfers:
  • Many online banks, such as ING Direct offer high rates (ING Direct currently offers 3% interest on savings accounts) and automatic transfers to encourage saving activity. ING Direct is even running a contest (although it ends this month) where they will give away $60,000 for setting up a direct deposit or an automatic savings plan for at least $100/month.

Now that you’re started paying yourself first, you’re well on your way to financial independence. You’ll soon have the freedom to live life on your own terms instead of from paycheck-to-paycheck. Just let the savings and interest pile up and your nest egg will be ready to hatch when you need it!

Other articles you might enjoy reading

• The Key to a Successful Financial Plan: Flexibility
• The Ball and Chain of Debt
• Reevaluating Our Emergency Fund
• Goals for 2008