This is part of a series of posts on 10 Important Financial Lessons To Learn While You’re Young. A new lesson will go up every Friday. And if finances bore you, don’t worry…I’ll keep posting non-finance things on Mondays!
Right out of college I figured the most important thing to do when I got a paycheck was to make sure there was enough to cover rent. Then I would pay all of my bills for that pay period, then make sure there was enough for groceries, etc. etc. I told myself that once the important things were taken care of I would put any “extra” money towards my savings.
Unfortunately, sometimes there wasn’t any “extra” money. I fell into the trap of “Oh look, there’s this whole big pool of money and I can just dole it out starting with the highest priorities and moving on down until it runs out!”
The problem was that I was putting an extra $100 into the coffee, movies, and restaurant budgets (which were really already at an appropriate size) when instead I could have been putting $100 towards retirement or saving for a family vacation.
Re-prioritize. Think of “savings” as priority #1; that’s the idea behind Pay Yourself First. Obviously this does not mean you should save for that trip to Hawaii at the expense of your grocery budget, but you should prioritize your savings higher than dead last, for sure.
Right now money is transferred to our emergency fund, our retirement accounts, our HSA (Health Savings Account), and our general savings account for vacations / weddings / new-computer / who-knows-what right after we deposit a paycheck, before we pay rent or any bills. This way we learn to live off of less than we make. NB: Be careful and realistic here. I’m not telling you to go crazy and save, save, save without making sure it’s practical first.
The idea is to gently teach yourself to live off of a little less so you can save more. There is tons of advice out there suggesting you follow the 80/20 rule (or 70/30 rule), but more important than what percentage of your income you save is that you are actually saving it at all. Don’t try living off of 70% of your take home pay right off the bat, that’s a huge change if you weren’t saving anything previously. But if you prioritize savings first and start saving a portion of your income as soon as you start making money you’ll find it’s not hard at all to do because you haven’t gotten used to anything more lavish.
If you’re worried about jumping in and starting to save money BEFORE you pay your bills, start with a very small amount, like 2%. Try it out, see how it goes, and if you’re comfortable with that you can slowly increase the amount by 1% or so each year until you get to your goal amount. (Remember it’s your goal amount, choose what works for you, don’t rely on 80/20 just because someone else told you that’s the norm.)
Even if it’s just a complete mind game, it makes the saved money feel like “extra money” because all of the sudden we’re not scrounging and scrimping at the end of the month to fund the IRA or HSA. It’s already taken care of!
Are you already paying yourself first?