How Money Works — Principle 2 — Pay Yourself First

No matter what your annual, a tremendous amount of money will pass through your hands during your working lifetime.

If you earn

An average of $25,000 for 40 years = $1,000,000
An average of $35,000 for 40 years = $1,400,000
An average of $45000 for 40 years = $1,800,000

So you see, it’s not that you aren’t capable of becoming wealthy. The raw resources—over a million dollars—are there.

It’s Not What You Earn It’s What You Keep

How are you doing so far? The answer to the chart below will help you gauge how you’re doing so far, according to your income level. Roughly figure how much money you’ve earned so far in your working life. Estimate a yearly “average” amount and multiply it by the number of years you’ve worked, Even if your salary is modest, it’s probably a pretty impressive figure. Now, the most important question: I-low much of this amount have you saved? Look at your savings account balance. What percentage of the substantial sum you’ve earned over the years is reflected there?

If you’re like most people, chances are you’re shocked by your answer. How could you have made all that money and saved so little? It’s easy to do. First, there are taxes. Then, after paying your monthly bills, you find that you have more bills remaining than you have dollar bills. It’s easy to see why people say they just don’t have any money to invest.

Unfortunately, if you don’t act now, 10 years down the road you may find yourself in exactly the same position.

“The personal savings rate is in negative territory.”
Newsweek.com February 1, 2008

Put Yourself at the Head of the Line

Strangely enough, the first step to financial security isn’t morn money.

The first step is to put yourself at the head of the line. That means putting your family’s future ahead of the landlord, the electric company, and all the other demands on your money.

Paying yourself first is good common sense. Before anyone else gets a claim to your money, pay yourself by pulling a set amount aside in a savings or investment account. A standard rule of thumb is to save 10% of your income. Each time you get a raise, adjust your savings amount up to 10% of that amount. If you can save more, that’s even better, but 10% will get you going in the right direction.

The Three Accounts You Need

To have a complete savings program, most people need three types of basic accounts:

Emergency Fund

Before you begin your long- range savings plan, it’s a good idea to establish an emergency fund. This is your reserve find in the event of an unforeseen emergency or an unexpected expense, like loss of a job, a serious medical problem or a major household repair. With an emergency find in place, you’re protected against being wiped out financially or being forced to withdraw from your long-term savings vehicle. A good rule of thumb: Set a goal of having three months’ salary in your emergency find.

Short-Term Savings

Once you get started building your financial security, you won’t want to set yourself back with credit card debt. This account is for money that you set aside or expenses such as a vacation or a computer.

Long-Term Savings/Investment

You’ll also need an account designed for the long term. This is where your retirement savings, college fluid and other long-range savings will go. These finds do not have to be as accessible, although it’s still wise to avoid heavy penalties whenever possible. There are a wide variety of long-range vehicles. For this type of cash accumulation, it’s wise to “invest” rather than to “save” with some type of investment account.

Put Your Savings on Automatic Pilot

If you’re not as disciplined as you’d like to be, direct deposit is for you! Let’s face it, once money is in your pocket
or in your checkbook balance the temptation to spend it can be irresistible. That’s why direct deposit works so well.

You simply arrange with the company where you work to have a set amount each month deposited directly into your savings or investment account. That way, the money goes in before you receive your check. The money’s not in your paycheck, so you don’t miss it. And, most important. you can’t spend it!

There arc additional savings strategies later on in this book that can help you select a savings/investment plan that’s right for you, and more. But, for now, it’s important to realize that paying yourself first is one of the most important keys to accumulating assets and building security.

Only 27% of workers are confident they will have enough money to live comfortably throughout their retirement years.”
2007 Retirement Confidence Survey

Taken from Chapter 2, How Money Works, Primerica Financial Services — http://www.primerica.com