Retirement Strategy: Pay Yourself First
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“Putting money away systematically is the best way to “dollar cost average” and save for retirement.”
-Jim Lentini, president, Lentini Insurance and Investments Inc.
Banks have various ways of attracting depositors, and some are more useful than others. Among the most attractive are automatic savings plans, which virtually any bank will set up for you. The bank with transfer specific amounts from checking to savings on specific days of the month. This is the surest way to save money.
Initially, target your savings at least 5% of your income and increase that to 20% (or more) as quickly as possible. The exception would be if you have debt with high interest. Getting that off your balance sheet would probably be the best first step.
Otherwise, pay yourself first. An automatic savings plan keeps money out of your hands. It takes your savings off the top of your income, just like the IRS takes taxes.
Most employers offer direct deposit of payroll checks. This makes having a specific amount transferred to savings on payday a snap. Many employers also offer automatic retirement savings plans, typically a 401(k). Automatic savings, particularly for retirement, is a great idea—especially if there is an employer match.
Make the minimum contribution necessary to maximize the employer contribution. Otherwise, you are passing up free money.
To meet the goals you set in Part One, set up a separate interest-bearing account. You also need an account for emergency or periodic expenses like dental care, car repairs, and replacement of appliances.
Ensuring that the money is there when the transfer is made can require more focus if you’re self-employed and don’t receive regular, reliable paychecks. In that case, just as you pay quarterly estimated income taxes, you have to plan your cash flow to fund the automatically transfer to savings on specified dates. (You also need automatic transfers into an income tax savings account.)
Whether you are employed or self-employed, the key to a successful automatic savings plan is to start with an amount you know you can cover and then periodically increase that amount. Smart small (even if it’s under 5%) and increase the amount as you develop the savings habit.
Reprinted from The Smartest Money Book You’ll Ever Read by Daniel R. Solin by arrangement with Perigee, a member of Penguin Group (USA) Inc., Copyright (c) 2012.
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