Pay Yourself First

With the removal of defined benefit retirement plans and the increased focus on 401k’s as the primary vehicle for retirement savings, it has become imperative for people to focus on building their own personal wealth. One of the most powerful ways to build your personal wealth is to “Pay Yourself First”.

Pay yourself first is a simple concept that takes strict self discipline to carry out. You start by determining how much money you need to save for your future retirement. At the beginning of the month, you put that money away first, before you pay bills, before you buy something for yourself. You commit paying this amount to yourself first for 6 months without change. After 6 months, you look back and see how well you are managing your finances. Can you save more money? Great. Do it. If you find that you don’t have enough money each month, you need to look at your spending and prioritize. Look for areas that you can cut back: magazine subscriptions, cell phone plans, cable bills, etc. The last thing that you want to do is to stop paying yourself first. The sooner you save for retirement, the harder that money will be able to work for you to build your retirement nest egg.

Another feature of your 401k plan that you may want to take advantage of is the automatic increase feature. This feature (if available with your plan) allows you to decide now to increase your contribution by a set percentage each year (up the maximum contribution allowed). An automatic 1 or 2% increase each year will help you to reach your retirement goals much faster than hoping that you remember to increase your contribution when you feel that you have enough take home money to spare. Since the auto-increase feature normally takes affect at the same time as your annual raise, you don’t feel the bite. You (hopefully) still see an increase in your take home pay, but at the same time, save more for retirement. It is a win-win.