Automate your savings – pay yourself first.
Last week I wrote about starting your first budget. Now that you have a goal, put the most import part on auto-pilot. Automate your savings and pay yourself first.
At minimum your budget should contain saving after all essential items are paid. Do not wait until the end of the month and hope that savings remains in your account. Create an automatic transfer for each day you are paid to move your budgeted savings to a separate account. This is what I mean by paying yourself first. Before you spend money make sure your saving budget is complete.
Not only should you save from your take home pay, but hopefully you have a retirement account available from your employer like a 401(k), 403(b), or 457(b). These are great tools for growing your saving. Many employers not only let you save money pretax, they also match your contribution. That’s free money. All you have to do is contribute to your retirement plan. Automate your retirement savings by contributing as much as possible up to the maximum allowed by the IRS. If you’ve paid off all debt other than your house I recommend at least 15% off your income.
Let’s assume in this example you make $50,000 per year with no pay increase your entire career. If you contribute 15% of your income into a retirement account with the 8% annual return average of the S&P 500, you’ll have $1.2 million at age 60. That’s the power of automated savings! Start early and often paying yourself and the returns continue to compound. Don’t take my word for it. Here is the math.
Try it out yourself using a retirement calculator with your exact income and the highest savings rate you can achieve. Compounding interest doubles your money every 9 years even if you never add another dime. It’s important to start saving now and take advantage of that interest growth as soon as possible.