Paying Yourself First

[timetosave]

Hi all. I've seen this several times in posts (and yes, I know this is a stupid question that an adult should already know) but I really don't, I am just starting an emergency fund at my age...

How much do you 'pay yourself'? How do you calculate that...what are you paying yourself for? Is this the money that goes into your emergency fund or some other type of fund. Should this be what I put aside for things like Christmas etc.?

thanks

G

[PrincessPerky]

I go with EF, but I don't have a good one yet. dunno what Ill do when (if?) I ever get done with it though.

Oh I do fund a vacation first...(yearly)

[Fillanzea]

what are you paying yourself for?

Think about it this way: when you get your paycheck, you pay your credit card bills, your utilities bills, your mortgage, your car payment, etc., etc., and if there's anything left over you keep it for yourself. But, if you take away some of your paycheck before you even see it and put it in a savings account, then you are forced to figure out how to live on a little less. When people get a raise, their spending expands too... so give yourself a pay cut, and your spending will have to shrink.

If you don't have an emergency fund yet, that's a very good place to start. That should go for things like:
-Emergency fund
-Paying off credit cards
-Retirement accounts
It's not a bad idea to take a little out of each paycheck for Christmas presents, but do that over and above what you need for an emergency fund and long-term savings. (Christmas isn't an emergency--you can see it coming months in advance).

Most people say that you should try to save 10 to 20 % of your pay. I save more because both my income and my expenses are very low. You can even start with something low, like 3%, and experiment with how much you can cut before it really starts hurting.

[PrincessPerky]

On that start small, start with 5 bucks if you have to, just take it out and lose it (preferably lose it in an interest earning account), then when you find you can live on less, take more.

If you set a goal, say 3 months to reevaluate. Most people can do without something or other for 3 months...at the end you may find you are more than willing to continue.

[Mathew Green]

My priority would be the emergency fund first, then retirement account, then an account to pay for your dreams like a special vacation trip or the down payment on a house. I'd do it in that order because: 1) the e-fund provides readily available cash, 2) retirement accounts have a yearly contribution cap that might prevent you 'catching up' later if you don't contribute now, 3) it's discouraging to set money aside for a dream and then have to tap it for mundane emergencies.

If you have a 401k available at work and your employer matches your contributions, using it may be the best option for your retirement account, but it does tie up your money long-term. By contrast, a ROTH IRA (but not a 'traditional' IRA) lets you withdraw money you've contributed anytime you want to for any reason with no penalty, so the ROTH can serve as both a retirement account and a backup super-emergency fund.

As others have said, start with 5%-20% depending on how much you can survive without, or start with a fixed dollar amount. You can always increase or decrease the amount as you gain more experience. My own method is to keep a mental $1200 cap on my checking account and sweep anything above that into the "pay yourself first" accounts. Paycheck comes in, payments scheduled that day get paid, and anything above $1200 is MINE! Of course you'll have to adjust those numbers to fit your own cashflow patterns, but this method works quite well for me. One of it's chief advantages is that it automatically pushes overtime pay, bonuses, and pay raises into the "pay yourself first" category, and automatic makes it less tempting to spend the extra money.

[timetosave]

Ok, thanks. I will figure this out and post what I've decided to get more feedback.

Thanks
G

[LuxLiving]

I'd say try for *10% at the vey least AS SOON AS YOU CAN GET THERE! Yes, you may have to start with $5.00, but I'd shoot it up as fast as you could to 10% and then go towards *15% by the end of year two. AND, I wouldn't use this money for CC debt. Absolutely not. This is for your future. CC debt is your past! IMHO, it should go to getting the emergency fund up and capitalized. Don't be discouraged if the first month or two you have to tap into it. BUT don't make it a habit.

You've probably been making car repairs or some medical expenses etc. spending on the credit cards in the past. And, until you get something put back for these types of emergencies then when something comes up in the next year you're likely to have to hit the EF for those items. Don't despair, just keep putting YOURSELF first on the list to be paid on payday. Over time the scales will tip in your favor.

Once you get into the swing of making a budget/spending plan each month then you'll see where you've left yourself open to DEBT. {out OUT D*mn Spot!! ...and then you'll start budgeting each month for car repairs, med copays, clothes for work, clothes for children, Christmas, etc. THEN when those events happen you'll be ready. Like the other poster said Christmas and back to school clothes - these things aren't emergencies! unless you spend the money you earn today that should be being set aside for these TO BE EXPECTED expenses.

After a bit the EF will get to that 3-6 months of salary level and you'll use it for what it's intended for - to buffer yourself in the event of a layoff/illness.

Once that's in place IF NOT BEFORE you can start your Retirement planning/savings.

The way I see it - you need those little subaccounts or something like them at some of the online banks like ING or ED where you can toss your daughters riding lesson money each payperiod, so when it's due you just run it back into the checkbook to make the payment. For example if the lessons are 1200 a year (for simplicity sake) then you need to be socking back 100.00 a month for that. Maybe 50 a month for Christmas, 50 for car repairs, 25.00 for copays, etc., etc. Plug in your own numbers.

I tell The Hubster every year the day after my birthday, only 364 shopping days left. But every year the week before my bd he's in a panic as to where he's going to get the money to buy me something. ...uh, dude, why not save a little all year long?? We don't spend much on each other for gifts, but a couple of bucks a month put back would buy a CD or something... KWIM??

*Where do we get the numbers 10% & 15%? Traditionally financial planners told people to save 10% of their salaries, but that is really not cutting it in today's inflated world. Go for the 15-20% range as soon as you can. Seems impossible at first, but you can do this!! I promise!!

[amberfocus]

Originally Posted by timetosave

How much do you 'pay yourself'? How do you calculate that...what are you paying yourself for? Is this the money that goes into your emergency fund or some other type of fund. Should this be what I put aside for things like Christmas etc.?

I think "paying yourself first" is the general idea that you should allocate money to go towards your OWN goals, rather than to someone else (e.g. expenses, bills, etc.).

One of the most common interpretations of 'paying oneself first' is to take out pre-tax dollars for a retirement fund. 10% is the generally recommended amount, but it should be higher for women, because women live longer. 12% is the minimum, 15% is good, 20% is even better, although it depends on when and how much you want to retire on.

Like the others have said, work up to it if you don't feel confident. Most employers let you change your contribution amount a set number of times a year (for me, it's four times per year, but for others, it's unlimited).

However, I dislike calculating these figures based on percentages, although I can see why that approach is useful. I like to take a SPECIFIC goal ($5000 emergency fund), figure out my timeline for saving (within two years), and determine how much I *should* be paying to reach that goal ($200 a month). I like knowing exactly where I'm going.

Currently, I'm saving for retirement, emergency fund, a car, and a house down payment simultaneously. But the allocations are wildly different. Right now, retirement is top on the priority list, so it doesn't get stinted at all. Next comes the car, because it's a smaller goal (I'm giving myself 12 months to get there). Once I reach it, money gets shunted over to the EF and house fund.

I'd say that Christmas is an expense, but all expenses should still be budgeted for. So set aside money for Christmas, but don't let that be a priority over your retirement and emergency funds. Pay yourself FIRST, and *then* figure out how to allocate what remains for the rest of your expenses.

Hope this helps!

best,
~mimi

[Mathew Green]

Originally Posted by LuxLiving

The way I see it - you need those little subaccounts or something like them at some of the online banks like ING or ED where you can toss your daughters riding lesson money each payperiod, so when it's due you just run it back into the checkbook to make the payment.

For me that makes it too complicated. I prefer to only have one account (or maybe two accounts at different banks). All the internal allocation is done privately on my Excel spreadsheet. Column 1 is date, Col 2 is withdrawals, Col 3 is Deposits, Col 4 is balance. I have an addititional column for each goal or special need and simply add the correct amount to each column whenever I make a deposit or withdrawal in the real account. (The same thing can be done using a pencil and multi-column ledger paper.)

By not establishing actual sub accounts, I don't have to spend time shuffling money among accounts online. I can also rename, combine, or eliminate accounts whenever I want to without having to go online. And if an emergency arises that requires more money than my emergency fund has in it, I won't need to pull money out of the sub-accounts because there aren't any sub-accounts; a quick bookkeeping entry to show how much I've 'borrowed' from each of my goals to meet the crisis, and I'm ready to roll.

Right now, I have five sub-accounts on paper, but only one real account and it's working well for me.

[LuxLiving]

Yep, I know there are folks like you out there Mathew Green. Whiz kids at the columnucleiruc {yeah, I just made that up! level, I'm just the slow girl who likes mine all spelled out nice and separate. Wish I was as advanced as you guys and girls who do it that way.

You'll probably agree that some level of differentiation is needed though for savers to actually 'get it'. Tell people to save and they'll tell you "I already do that." Oh really, do you save for car repairs, "well, uhhhhh, no." Do you save for your house taxes, "uhhh no." Got money put back for your next dental visit? "uhhh, no, why are you asking me all these pesky questions????

Most people do better knowing WHAT they are saving for - having a target.

Your method works. Other people can just toss it in the one pot and keep it all in their heads! Amazing!! For me and others although a bit more labor intensive we like to keep our pennies in a different jar than our nickles.

To each his own and whatever works to get her to start saving back for these sometimes erattic (sp?) expenses.

[timetosave]

Hi, I have 50.00 bi-weekly put into a Fidelity account. I had 120 bi-weekly put into a CREFF account for about 9 years at my last job. I will up my savings to my Fidelity account to 75.00 bi-weekly that will be 15% of my income. That has been going on since the 1st of the year (when I could sign up for it at work). I've always done that at every job I've had...just makes sense.

I have a flex spending account that I had 1,000.00 put into this year. I did not know how much I needed in there (I've already use it up with dds braces) and know in January I need to increase that to 2,000. This account has paid for co-pays/meds/etc.

I will use ING for all my sub-accounts.

Emergency Fund
Riding Lessons
Ski Lessons
New Tires
Auto Repair
Auto Insurance
Gas
Christmas Fund
DDs Activities (sports etc)
vacation
School Clothing



Now will ING allow me to actually set up sub-accounts with these headings or is it just a single deposit and I need to keep a spreadsheet with the details?

My goal is to be able to put at least $10.00 bi-weekly into each of these accounts

I have 250.00 already to be transferred to the EF
I will start the riding account off with 70.00 (two lessons)
and just start funding the others for the upcoming year. The 'gas' account is for emergencies only.

How does this look?

G

[timetosave]

What a concept...I'm actually 'PLANNING' my savings..wow...what a concept.


G

[amberfocus]

Originally Posted by timetosave

Now will ING allow me to actually set up sub-accounts with these headings or is it just a single deposit and I need to keep a spreadsheet with the details?

My goal is to be able to put at least $10.00 bi-weekly into each of these accounts

Yup, you can have all these subaccounts. Just create a new account, and give it a different nickname.

You can also set up automated transfers from one subaccount to another, at set time points. Quite handy.

~mimi

[LuxLiving]

I'm so proud of you timetosave!!! Yes, they'll let you do the separate subaccounts. Just start an account and it will give you a space for the 'nickname'. IMPORTANT: Be aware that at ING it sometimes takes 2-3 days for them to get the transferred $$'s back into your checking account when you wish the money to return for bill paying. So give yourself a little time in that respect. Riding Lesson due to be paid on the 15th, set up a transfer on the 10th or 11th to be on the safe side.

[Mathew Green]

Originally Posted by LuxLiving

To each his own and whatever works to get her to start saving back for these sometimes erattic (sp?) expenses.

Yep, that's the important point.

[timetosave]

I honestly don't understand how I've put this off for so long...I guess I was just afraid of it...it is surprising how much fun this is...how easily I took to it and how it has taken over me...that last point is the part that really has my head spinning but in a very positive way.

I have a refund check for dd's braces coming next week for 550. 500.00 going to a car payment and 50 to start funding these subaccounts.

G

[timetosave]

Would someone please post the link to ING that gives me the $25.00 for opening an account. Thanks
G

[LuxLiving]

Jeffrey has some that 'I think' benefit the upkeep of this website. However, if he doesn't come along with the info I can email you one of mine and it'll go to my upkeep!

[LuxLiving]

Try here:

ING $25 Bonus Links

[Broken Arrow]

Originally Posted by timetosave

How much do you 'pay yourself'? How do you calculate that...what are you paying yourself for? Is this the money that goes into your emergency fund or some other type of fund. Should this be what I put aside for things like Christmas etc.?

This is a very good question for me right now, because things are kind of up in the air due to my recent relocation.... For example, I still don't know exactly how much to budget for utilities.

So, I'm slightly concerned I may have overextended my budget....

For now, I am allocating 25% for retirement, 25% to pay down the student loans quicker, and 12.5% or so for savings (which includes paying for the holidays). The savings is lower because my emergency fund is a fairly healthy size right now.... The rest of the budget is necessary just to live (rent, gas, food, etc.)

It's a bit aggressive, but with any luck, my budget will hold. I'd hate to have to cut back on retirement and/or student loans....