As long as you are disciplined about your savings, having a budget doesn't matter, according to Certified Financial Planner Doug Lockwood. Although a formal budget might not help all people, it's still necessary to have clear financial goals and to regularly assess your progress toward meeting them. Regular contributions into savings, investment or retirement plans provide you with a solid foundation upon which to build financial health. Paying yourself first in this way, even before tackling household bills, is an effective long-term strategy.
Pay Yourself First
1. Determine the amount of contribution. Experts generally recommend that a percentage of your income, from 10 percent to 25 percent depending on your age and situation, be devoted to savings. While 10 percent might be easy to remember, so is the philosophy of "Start Late, Finish Rich" author David Bach: set aside one hour of each day's earnings. Based on an eight-hour day, this is 12.5 percent. Bach recommends that those who are in their 40s and just beginning to save should double the amount to two hours per day, or 25 percent. Since this is a hefty amount of cash, Bach concedes many people will have to work up to this amount over time.
2. Determine where to put your savings. With consultation from a financial adviser, determine whether you should contribute simply to savings, investments in the forms of stocks and bonds or a combination of these options. Deciding to contribute into a 401k or another retirement plan is another factor to consider. Your age, family situation and life goals will determine where you put the money you've chosen to pay yourself.
3. Make your contributions automatic. Automatic deductions remove the need for you to make a decision to save every time you receive a paycheck. Not having the choice to allocate the money to a bill, household item or impulse buy will ensure your savings will receive regular contributions and continue to grow. Thinking of your available income as only that which is left over after you've paid yourself first will force you to live on less.
Get Your Money In Order
1. Identify and write down financial goals. These can include retirement age, private school tuition for children or paying off debt. Give each goal a rough timeline and assess your progress periodically; for example, if you plan to save enough money to send your child to a private school in three years, assess how much you have saved after six months or one year and keep abreast of changes in the school's tuition rates. Depending on the goal, you might have to designate more money toward the goal, change your spending habits or give yourself more time.
2. Reduce the frequency of credit card use. Having available credit is an invitation to spend beyond your means. Using only cash for a month is a good way to determine how much less you will spend without access to credit, according to Lockwood. Ask your card issuer to reduce your limit if you are not able to abandon cards completely.
3. Educate yourself about economics and financial matters. Financial education classes are a starting point to getting a handle on personal finances. Reading financial media online and watching business reports on television are another way to make economic matters less of a mystery. Lockwood cautions against overwhelming yourself with too much information, but to start with some basic knowledge to give you confidence around money.
- CBS News; 'Pay Yourself First'; Tatiana Morales; February 2009
- PBS; Teacher Guides By Film - The Madoff Affair; Introduction to Investing; Pay-Yourself-First Budgeting Student Handout
- "US News and World Report"; Three Steps to Strengthen Your Personal Finances Now; Doug Lockwood; November 2010
- "US News and World Report"; The Simple Way to Get Rich -- Pay Yourself First; Ryan Guina; July 2010
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