Each month you settle down to pay bills, but do you pay yourself? One of the most basic tenets of sound investing involves the simple habit of “paying yourself first,” in other words, making the first payment of each month into your savings account.
Americans’ saving patterns vary widely. Too often, short-term economic trends can interrupt long-term savings programs. For example, the U.S. Personal Savings Rate jumped from 3.5% to nearly 8% in May 2008 during the housing and banking crisis. It then rose and fell sporadically as the economic environment appeared to stabilize.1
Anyone who’s ever managed their own finances knows that saving can be a challenge. There seems to be an endless stream of expenses that demand a piece of each month’s paycheck. Herein lies the benefit of paying yourself first: you get the cream at the top of the
The trick is to prioritize. Make it a point to put your future first. At first, saving may mean a small lifestyle change. But most individuals want to see their net worth increase steadily. For them, finding ways to save becomes more of a long-term commitment than a short-term challenge.
If retirement is your priority, consider employer-sponsored retirement plans, such as 401(k)s and 403(b)s. They can be a great way to save because the money comes out of your paycheck before you even see it. Also, as an added incentive, some employers offer to match a percentage of your contributions.2
Consider developing the habit of “paying yourself first” today. The sooner you begin, the more potential your savings may have to grow.
1. Bureau of Economic Analysis, 2017
2. Distributions from 401(k), 403(b) and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
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