Paying myself first!

[Seanpm]

I am 23yrs old and not married. I have two debts that I am paying off in the form of a car loan as well as a credit card. Neither of these debts are spinning out of control, I am paying on time and paying double my car loan every month as well as a little extra toward the card.

I am now at a point in my life where I feel I have a little extra money to begin paying myself. Not that I haven't already done so, but prior savings have been nothing more then savings accounts. With that said I am looking at long and short term goals. My long term (retirement) I am planning to open up a Roth IRA before March of 2010. I will also be investing in some CD's and let them mature and just roll the over at full maturity.

My question is in regards to short-term savings. By short term I mean I would like to start saving a little bit of money for life events. (marriage,house,kids,etc) What is the best investment to make towards these short term goals? With these investments is there a start up capitol required? What are the risks of said investment?

[shultice24]

My question is in regards to short-term savings. By short term I mean I would like to start saving a little bit of money for life events. (marriage,house,kids,etc) What is the best investment to make towards these short term goals? With these investments is there a start up capitol required? What are the risks of said investment?

I'm a huge fan of having defined savings accounts for various purposes, and my opinion is that money that is tagged for a certain purpose should be in low-risk places like an FDIC bank account. The return stinks, but there's no uncertainty due to volatility. It would royally suck to have a bunch of money that's tagged for a wedding invested in the market, then have stocks fall off a cliff just as you're planning to marry your sweetheart.

Like I said though, that's just my opinion. I'm willing to stomach market risk on long-term retirement savings, but not money I want to use for a given purpose in the near to mid-term future.

[investingnoob]

I invested a little chunk in a bond mutual fund, a small risk but I'm willing to take that chance.

[buildmybudget]

For these types of expenses you need liquidity...which means either a savings account or money market account. You could also start a cd ladder, but that would take some time to become liquid enough to be useful in the case of an emergency.

Whatever budget tool you are using should make it easy to see how to maximize your savings each month. Once you get paid, make a transfer to your savings account before you pay your other bills and you truly will be paying yourself first. Over time it becomes addictive and in no time you'll have an emergency fund that will help you reach some of these short/long term goals.

[lovcom]

Pay yourself last, not first.

Here is what I'd suggest:

1. Create an emergency fund to cover 6-9 months.
2. Then pay yourself last: by paying off all your debt in double/triple payments.
3. Once your debt is killed, then pay yourself first.
4. Make saving and being frugal a permament lifestyle change going forward.

Paying one's self first is just a marketing ploy investment firms came up with to get at your money faster, and on THEIR timetable and not YOURS.

As to what to invest in? Once steps 1 through 4 are done, I'd start saving up for a down payment on a condo or such housing. Forget about the stock market, the bond market, and other forms of gambling....when done right, real estate is the safest and best place to invest your money...now is a buyers market (which I believe will last for a few years at least), and if you have good credit and a good down payment, you should have little troubled doing the deal. Buy the first condo/house with the idea of converting it to a rental years later, and in this way you can hop scotch into other properties over time. I did this starting years ago, and every 2-5 years I would buy another then another rental, and today I have 7 such properties. I have no stocks, nor bonds, and I think my rentals are a lot better place for my money, and again, I don't like gambling.

[TermMonster]

I really like lovcom's 1-4 list - very well done!

If you do consider directly investing in real estate you should know that the average historical returns (over the last 40 years) have been 4% per year. There are opportunities for great returns and success stories abound (lovecom was nice enough to share one). These returns are NOT without risk. Most people who bought homes over the last 3 years are underwater on their investments. The amount of debt typically used to finance these purchases will magnify returns both positive and negative. It also takes a lot of time to be successful buying, selling, and managing rentals.

Proceed with caution (as you would with any other investment). Always remember there is no "sure winner" in the investment realm.

[buildmybudget]

Paying yourself first is not just a marketing ploy. It is possible.

If you know what your paycheck is going to be and what expenses need to be paid out of that paycheck, you can calculate what is leftover. Then subtract the amount you want to keep in your checking account as a buffer and you have what is available to pay yourself with.

Paycheck: $1000
Expenses: $800
Leftover: $200

Account Buffer: $75

= What you can pay yourself first = $125

And paying yourself first doesn't mean you aren't creating an emergency fund, it means you are guaranteed to save rather than spend the difference between your income and expenses. It means that you are ensuring that you are going to set that money aside to increase your savings or EF or to put towards debt.

[watsoninc]

I agree I would pay myself last while getting rid of the debt first, provided that you can eliminate the debt within a relatively short period (i.e. 18-24mo). If you wait too long (i.e. 5-7 years) to begin investing, that could be concerning because of your loss gains from investments due to loss of compounding. However, if you are able to dbl or triple your debt payments, you can accelerate your debt repayment and then do some substantial investments after your finish.

[lovcom]

Paying yourself first is not just a marketing ploy. It is possible.

If you know what your paycheck is going to be and what expenses need to be paid out of that paycheck, you can calculate what is leftover. Then subtract the amount you want to keep in your checking account as a buffer and you have what is available to pay yourself with.

Paycheck: $1000
Expenses: $800
Leftover: $200

Account Buffer: $75

= What you can pay yourself first = $125

And paying yourself first doesn't mean you aren't creating an emergency fund, it means you are guaranteed to save rather than spend the difference between your income and expenses. It means that you are ensuring that you are going to set that money aside to increase your savings or EF or to put towards debt.

No, that is still paying yourself last because what you pay yourself is a function of what is left over after expenses.

If it were paying yourself first, you'd pay yourself X dollars, then with the rest pay your expenses...this can't happen unless you want to miss payments or underpay.

This pay your self first platitude is rubbish...and is a very old saying that came out of the investment industry to make sure their clients always had $$ for their investments.

[lovcom]

I really like lovcom's 1-4 list - very well done!

If you do consider directly investing in real estate you should know that the average historical returns (over the last 40 years) have been 4% per year. There are opportunities for great returns and success stories abound (lovecom was nice enough to share one). These returns are NOT without risk. Most people who bought homes over the last 3 years are underwater on their investments. The amount of debt typically used to finance these purchases will magnify returns both positive and negative. It also takes a lot of time to be successful buying, selling, and managing rentals.

Proceed with caution (as you would with any other investment). Always remember there is no "sure winner" in the investment realm.

The thing about real-estate is that in times like the present, it can still be a great time because if one buys to keep and rent out later, then the appreciated value is not so important...leave that to the flippers that buy and sell to try to make a buck.

I would suggest the OP perceive R/E as a series of stepping stones. His first place will eventually be a rental, then he moves on to his 2nd place, then 3rd, etc....keeping all or most of his prior properties, and over time he has 5, 8, 10 rentals and by middle age, he very well may have a nice income for retirement if he does it right.

I've been in R/E for years, but I was never in it for flipping...so I have little concern for appreciated values over the long run.

[disneysteve]

I think that paying off debt IS paying yourself because the sooner you pay off the debt, the less you pay in interest so it is actually a form of savings.

That said, I think the "pay yourself first" mantra is intended to apply to people who aren't in debt. It means that you shouldn't go about your business and only save what is left at the end of each month because with that mentality, there will often be nothing left. If, instead, you take 10% or 20% off the top and live on what's left, you will always be saving and never living beyond your means. Someone with outstanding consumer debt, however, is already beyond their means and that situation needs to be corrected first before other savings can happen.

[lovcom]

I think that paying off debt IS paying yourself because the sooner you pay off the debt, the less you pay in interest so it is actually a form of savings.

That said, I think the "pay yourself first" mantra is intended to apply to people who aren't in debt. It means that you shouldn't go about your business and only save what is left at the end of each month because with that mentality, there will often be nothing left. If, instead, you take 10% or 20% off the top and live on what's left, you will always be saving and never living beyond your means. Someone with outstanding consumer debt, however, is already beyond their means and that situation needs to be corrected first before other savings can happen.

Agreed....one should never pay themselves first until they are consumer debt free. As we all know, consumer debt can put one in prison, remove lots of options in their life, and hold them back for years or even decades.

However payments to consumer loans are not really savings, as I see it. It's loan maintenence and nothing more. However your point is not lost, when paying this type of thing down aggressively and fast will get one to the point where one can pay themselves first faster.

One strategy is to treat a monthly savings plan as a "bill". And like all bills, they most be paid each month.

I have a 20 year old daughter that for some reason recently has started paying her self "first". She just bought a $300 Coach purse, and her car payment is going to be paid 18 days after the due date. I told her to get the car & insurance paid first and foremost, then add to her savings, then she can save over serveral months for that purse, although it is a waste of money, but at 20 she thinks it is a necessity.

Her older sister gets it....maybe the younger one will after I show her the marks on her credit history and the consequences of those....some kids learn faster then others lol.

[buildmybudget]

No, that is still paying yourself last because what you pay yourself is a function of what is left over after expenses.

If it were paying yourself first, you'd pay yourself X dollars, then with the rest pay your expenses...this can't happen unless you want to miss payments or underpay.

This pay your self first platitude is rubbish...and is a very old saying that came out of the investment industry to make sure their clients always had $$ for their investments.

Clearly you have to understand what amount you can pay yourself--which requires some simple math. Of course it's a matter of opinion whether it's truly possible to pay yourself first, but anyone who is focused on saving OR paying down debt should be focused on moving that chunk of money first(before paying bills). It's that simple. Either you are proactively managing your money and being smart with it...or you are just moving whatever happens to be arbitrarily left over.

[lovcom]

Clearly you have to understand what amount you can pay yourself--which requires some simple math. Of course it's a matter of opinion whether it's truly possible to pay yourself first, but anyone who is focused on saving OR paying down debt should be focused on moving that chunk of money first(before paying bills). It's that simple. Either you are proactively managing your money and being smart with it...or you are just moving whatever happens to be arbitrarily left over.

I think it immoral to pay one's self first if one has outstanding consumer debt.

It's like eating dessert before the main course, veggies, and meat.

It's taking a reward before earning it.

It would be far better to pay yourself last then once the consumer debt is gone, now you can enjoy being paid first, saving, and all the benefits that come out of that.

The only caveat to what I suggest here is that one should fund their emergency fund first before being aggressive with debt paydown, and once the EF is funded, pay one's self last, focusing on aggressive paydown of consumer debt first.

[snafu]

Kudos to you Seanpm for being aware of the need to plan expenditures. You are wa-aay ahead of most 23 y/o.

I suggest accessing the stability of your employment and begin with an Emergency Fund that reflects 2 - 9 months income to cover basic needs. Have a look at money Market Funds, their minimum opening balance and contribution requirements as an initial goal.

'Investing' as opposed to 'gambling' requires a minimum 5 year commitment in my view. You keep adding a specific sum to an investment a/c perhaps a mutual fund each and every month for 5 years. Yes, you will see movement, mostly up...sometimes down but it is most important to stay the course.

If you plan to use that sum in less than 5 years, it is better to develop a savings plan, contributing to Money Market or simple savings a/c until there is enough to begin the laddered CD process. Interest rates are lower than inflation just now but should be rising soon as the point spread is out of kilter.