What It Really Means to Pay Yourself First
Author’s note: this article was originally published on May 26th, 2017.
You've likely heard the statement "pay yourself first" before.
But what does it actually mean to pay yourself first? In short: it means saving for the future so that you can live a life of financial independence that you someday hope to achieve. Paying yourself first means saving for future you.
Not saving? You're not alone. The average American couple only has only $5,000 saved for retirement, and only 1/3 are contributing to company retirement plans (if they're lucky enough to have one.) It's clear that there is very big gap between where people are and where they want to be. The gap is widened by what they're doing with their money.
Saving Enough means Saving Excuses
It's not unusual to hear the a few of these lines when talking retirement savings:
I can't afford to save for retirement.
Saving (or saving too much) will interfere with my lifestyle.
I need to focus on paying down my debt.
I need to pay for my kids' college/car/etc.
Do any sound familiar? The reasons above are at odds with most people's (and likely your) financial goals. I'm not here to argue that the above items are unimportant. What I am here to argue, however, is that saving for the future needs to take priority. Here's why.
Consider the following data on life expectancy, courtesy of the Social Security Administration.
A man reaching age 65 today can expect to live, on average, until age 84.3.
A woman turning age 65 today can expect to live, on average, until age 86.6.
And those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.
So, on average, someone who wants to retire at 65 should plan on at least 20 years of retirement. Anecdotally, most of the people I talk to have their hearts set on retiring earlier (age 60 is not uncommon.) Also, planning for a longer retirement is a more conservative approach.
Can't Envision Retirement? Try This
Many younger individuals and families I talk to have a difficult time knowing how to plan for retirement because it is just so far down the road.
Here's what I tell them: Imagine yourself retiring today. You have no debt, and no kids with expensive college bills. Your sole purpose: living the life you want. You have complete and total financial independence. What does that mean for you? World travel? A quiet lifestyle at home? Your vision of financial independence should serve as a guiding light towards the person you'll eventually become - older you.
"I Don't Want to Retire"
Often, I talk to people who tell me they'll never retire (I include myself in this category.) It's admirable to be passionate about your profession, but it's naïve to assume your body and mind will last forever. Whether you want to fully stop working, have a work-optional lifestyle, or continue working until the day you die, you should come face to face with the fact that one day, you might have not have a choice.
Breaking It Down
Now that I've sold you on the idea of saving for retirement (I hope), I'll acknowledge that it can be a challenge to determine how much to properly save. In order to determine that, there are multiple factors that need to be considered. Some helpful questions to ask yourself include:
What does financial independence mean to me?
What would a monthly budget look like for me, if I were completely independent? (tip: break it down, item by item.)
How much can I reasonably expect my investments to grow each year, until I retire?
How much can I reasonably expect my investments to grow after I retire? (this is a separate question - remember, you can't afford big losses after you retire, so you shouldn't take as much risk.)
To what degree do I want to count on social security and/or a pension? (Fun Fact: 60% of millenials expect social security to be bankrupt by the time they retire. For younger generations, this means that in order to properly plan, you need to know what it will take to fully self-fund a very long retirement.)
Finally - don't forget to factor in inflation - the inevitable fact that the cost of living goes up. Consider the 1987 prices of the following items, provided by bureau of labor statistics:
Gasoline, 97.0 cents/gallon
Apples, 73.0 cents/pound
Potatoes, 24.7 cents/pound
White bread 57.1 cents/pound (the avearge loaf of bread is 1 pound, 6 ounces)
Milk, $1.09/half gallon
In short: if you're planning on a long life in retirement, you need to plan on things getting more expensive over time.
The Bottom Line
There's no time like the present to start saving. With fewer financial certainties and longer lifespans, it's up to you to take control of your financial future. That means saving early, and saving often - future you is counting on it.
https://www.ssa.gov/planners/lifeexpectancy.html
https://www.forbes.com/sites/alexandratalty/2015/06/30/forget-social-security-pensions-millennials-need-to-plan-for-retirement-now/#3f1047d63f10
https://www.bls.gov/opub/mlr/2014/article/one-hundred-years-of-price-change-the-consumer-price-index-and-the-american-inflation-experience.htm
