There is one big secret to personal finance: pay yourself first.
People define this practice in several ways. Some say to set aside one hour’s worth a wages every work day. Others simplify it as taking 10% (or more) off the top of your paycheck. Every paycheck. Forever.
So what if you’re like many people and are getting a late start? The simple truth is that to build a solid financial foundation you must adhere to this principle. So how can you jump-start your “pay myself first” account? Here are four steps:
1. Set up a 401(k), 403(b) or IRA. You can get help through your Human Resources department, your bank, or by doing your own research online. I personally think a good account for beginners is ING Direct.
2 - Put at least two hours of wages into a tax-deferred account like your 401(k) - every day. This is perfectly legal, and smart, too. Uncle Sam is your best investing partner. Sound impossible? Start with putting just 1% in every month and increasing this by 1% every month. In two years you’ll be saving 25% of your gross income.
3. Make it automatic!! This is key. If you don’t see it, you won’t spend it. Set up your retirement account so that it automatically pulls money every payday.
4. Max it out. Make it your number one priority to max out your account with the legal limit of contributions you’re allowed. Do this every year. Yes, this is ambitious. But if you’re starting late you must commit to big action. This is your future we’re talking about!
A tax-deferred account is just one part of the “pay yourself first” plan. To really rev it up, you should also maximize your other investments and savings. They all work together. And if you’re getting a late start it’s important than ever to act.
Related:
Three Reasons Uncle Sam is Your Investing Partner
The 10% Rule
Four Smart Ways to Invest Tiny Sums
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