You would think that at my age I would have known this earlier, but I guess I’m slow. Being in my early 50s and recently divorced has put a much brighter spotlight on my finances, especially retirement savings. I was doing so many things wrong when it came to my money, but the biggest thing I did wrong was not paying myself first.
I used to try to pay all my bills and then if anything was left over I’d try to save it. That rarely worked out, like never worked out, mostly because I’m not that disciplined. It was easy to blow a couple of hundred dollars on whatever and not even remember what I spent it on.
A better way to go about it is to pay yourself first. Then, pay your bills. I don’t know about you, but I don’t work to make other people wealthy. I work to support myself and have a decent life. I think a lot of us forget that with bills rolling in and money going here, there, and everywhere but into our own accounts. We don’t exist just to pay bills, but that’s what life can become.
So, right off the bat, I now contribute a high percentage to my 401k and to a private IRA account. I guess I could just put it all into my 401k, but I like having my own separate investment that I have more control over. Maybe it’s just a psychological thing, but I look at my IRA account as a savings account for the future that I can’t touch right now, and my 401k as part of my monthly income when I retire.
Along with retirement savings, make sure to save for an emergency fund in a regular savings account. Some recommend three months of income, others six. Since I’m divorced and only have myself to rely on, I’d be more comfortable with 12 months, even though that’ll take a while to build up.
After you pay yourself, then set a budget out of what’s left. You can spend that money however you want.
Financial experts recommend paying yourself 20% of your yearly income. Yeah, that much. Most Americans are woefully behind on their retirement savings, and not saving nearly enough out of their paychecks. So, if you think contributing 3% to your 401k is going to cut it, think again.
If you can’t afford to save 20% right now, save what you can and focus on paying off debt, downsizing, living within your means, blah, blah, blah. Personally, I would focus on building up an emergency fund first, and then pay off debt. If you don’t have money in your savings, those unexpected bills (which will happen) will just become more debt on a credit card or elsewhere. Plus, I live with far less stress when I know I have money in savings.
Don’t kick yourself if you’re behind. Most Americans are. Most of us were never taught how to save or invest. My parents’ generation had pensions. They didn’t have to prepare for retirement or save so aggressively. I am seeing younger generations being much smarter with their savings and investments, but many Gen X’ers and younger Baby Boomers have a lot of catching up to do. Just start somewhere and be good to yourself.
