A vacation to the Caribbean, your child’s summer sports camp, or a well-funded investment account all require resources.
How do you ensure that you have the resources to fund these endeavors?
Pay yourself first.
By paying yourself first you are ensuring that you have the funds to meet your future obligations, desires, or to simply achieve a high level of financial security.
Here is how you do it.
If you are compensated via direct deposit from your employer, add an additional savings or investment account so that a portion of your paycheck is automatically diverted there. If you receive physical checks, deposit the money into your primary bank account, but divert a portion of those funds to the separate account. This process can be automated as well.
In doing so, you are achieving two primary outcomes: (1) training yourself to live within your means, and (2) saving for a specific purpose…whatever that may be.
First, you will need to determine a realistic percentage of your income you are willing to live without…because you are. Once you divert the funds to savings, you are not tapping those resources other than to fulfill their intended purpose. If you have established an investment account and are planning to invest for the long-term, you won’t be withdrawing at all.
That percentage may be 5 or 10 percent to start, or it may be higher. It depends on your unique situation, and you can adjust the percentage after developing comfortability with your new budget. You may find that you don’t require nearly as much, and that you have more wiggle room to save than you have trained yourself to believe.
Once you have selected your savings rate and you have implemented the change to your direct deposit, sit back and watch your money tree bear fruit!
What kind of accounts to you recommend I invest in? And how much fruit are we realistically talking? Most rates I see on savings accounts are in the neighborhood of 1-2%. With a US rate of inflation sitting at 1.9%, I’m not even hedging those static funds against inflation, corroding my purchasing power and only marginally improving my financial situation with available capital. My money tree may rot before I find soil rich enough to bear its fruit in.
Hi John,
Thanks for the comment. The answer is, it depends. What are your savings goals? What is your time horizon? I only leave funds in a high-yielding savings account to serve as my “emergency fund” and to save for specific short-term goals (e.g. purchasing real estate in the near future). I contribute significantly to my 401k and Roth IRA. These retirement vehicles have a significant time horizon (I won’t need them for many years), and I invest heavily in funds that track a broad index (e.g. S&P 500) as well as some fixed income instruments to hedge the risk.