It’s a common phrase we hear when we finally decide to listen to personal financial advice. But what does it mean?
Normal vs. Common
It seems many people pay their bills and spend what they need to spend, and attempt to save what is left over. That always means that saving is last, and ends up being much less than desirable.
While the Pay Yourself First advice has been around for a long time, it’s important to recall that not everyone is at the same place in their journey to financial stability. As a result, we acknowledge what has helped us in our journey.
The Better Plan
The change to Pay Yourself First means put savings first. These days it is easy to “automate” savings. When I was working, I set up automatic deductions for savings and investment.
Participating in a 401k or 403b (or similar) is a prime example of paying oneself first because the money is deducted from one’s income before you receive your salary.
My Take
Participating in a 401k, 403b, etc., are good steps towards a positive financial future. I would argue that these are not enough. Having “all” one’s savings and investments in one or more tax deferred accounts is risky. I made that mistake, as I outlined some of my experience with initiating saving and investing in the posts A Financial Epiphany, Part I and A Financial Epiphany, Part II.
Therefore, one needs other savings and investments.
In my working years, I added other automatic deductions. (This can often be done using payroll deductions from an employer, or from a checking account at a bank.) Funds were transferred at every pay period into savings. I also subsequently automated some investments.
What is the risk of only saving in deferred accounts?
While 401k, 403b, and related accounts are good things, I think these are insufficient for a well-rounded individual for a positive financial future. Firstly, deferred accounts carry a hefty penalty for early withdrawal. Secondly, even after one can withdraw penalty-free, there is the not-small burden of taxes. Thirdly, the funds are stock-market oriented. The stock market does not always go up. Fourthly, tax deferred accounts are destined for one’s retirement years. What to do if you want to accomplish things before you retire? Things like putting down a down payment on a house or other big ticket item, starting a business, and so on.
A Path
My suggestion is to also save and invest from one’s disposable income.
How to Automate Some Investments
It is possible to automate some investments. I would suggest automating investment only after one has a good emergency fund, and one is stable with savings and expenses. To automate investment, one can set up monthly deductions from a checking account to regularly (usually monthly) buy stock in a company. This is often set up though the company’s transfer agent. (Check with the company to find out who their transfer agent is.) There are things to know, and pros and cons, before embarking on automated investments, so read the prospectus carefully.
How do you Pay Yourself First? Let me know here.
Charlie Parker’s saxophone, built around 1947, is in the collection of the (and courtesy of) Smithsonian National Museum of African American History and Culture.
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