Another financial advice course that I’m studying is again promoting “Pay Yourself First”. This course promoted “Pay Yourself First” as investing pre-tax dollars into a 401k provided by your employer.
One of the key aspects of this is that many companies offer “matching” so any contribution you make, your company matches (often doubles) that contribution. So if you aren’t taking advantage of this, you are “throwing free money away”. The mistake I see, is that younger people (twenty somethings) aren’t thinking about the future, don’t understand money or investing, and feel like they can’t afford to save.
For anyone that feels they can’t afford to save anything, a good dose of brutal honesty is worth considering. Life is full of choices. Yes, there are people who literally have no income or insufficient income to “survive” (yet amazingly they somehow manage to survive anyway!). But a whole lot more simply refuse to see or accept the choices they could make but refuse to make. Certainly I’ve had my fair share of “life isn’t worth living without XYZ”. It would be kind of silly to tell a homeless person to start an IRA, but if you aren’t homeless make an attempt to be brutally honest with yourself.
This leads us to another key aspect: self discipline. Many, many people lack self discipline and those people will never be wealthy or financially successful. They may win the lottery, but they spend the money rapidly and in no time are broke again. When you get a raise, the first thing you should do is invest. Pour that extra money into making more money before you raise your standard of living and splurge on something you want but don’t need.
Let me use an example. In “pay yourself first” you invest $15 and then at the end of the month you can’t pay for Netflix. You are sad but you cancel Netflix because you can’t afford it.
The alternative is that you pay for Netflix first and then at the end of the month you have no money left to invest. You throw your hands up in despair and resign yourself to being poor.
Perhaps you aren’t happy with either of the above situations so it’s time to dive deeper and consider alternatives. Perhaps Hulu at $1 a month is good enough as it will provide more video entertainment than you have time to watch. Or maybe a lower cost service like Apple TV is your compromise. Perhaps you do more reading? Maybe you contemplate which is more important to you: Spotify or Netflix?
One key factor in “pay yourself first” is that you are saving (and growing) un-taxed money. (you’ll pay taxes later when you retire and have to withdraw this money) This gives you roughly a 33% boost in money! So if you aren’t paying much in taxes, or extremely little, this strategy doesn’t benefit you anywhere near as much as someone earning a lot more.
I’d like to mention a point where I disagree with some financial advisors. Roth vs Traditional IRA. With a Roth you are paying the taxes now (on a small amount of money), but not paying taxes on a much larger amount of money when you retire. I’d suggest when you are young and earning a low income (paying very little in taxes) put money into a Roth. As your earnings grow and you start paying a lot more taxes, shift more toward saving with a traditional account (you will get a tax break and have more money to invest). The balance of Roth vs Traditional should be adjusted as your circumstances change.
In my opinion you almost always will want a little bit of Roth money to pull tax free when you first retire. This gives your other (traditional) investment funds more time to earn more money to cover the rest of your retirement.
It shouldn’t even need to be said, but a huge mistake that most Americans make is credit card debt. Never carry a balance on your credit cards! If you can’t afford to pay if off that month, then don’t buy it!