Pay Yourself First Each Month

People have heard about savings a bit each month to have a nice sum in 20, 30 or 40 years. The problem is you spend your salary each month and possibly save what is left in the checking account at month's end. This is not the way to save. You need to Pay Yourself First each paycheck.

First, sign up for your 401k at work, if one is offered. Contribute the maximum you can without leaving yourself broke. If you have to suffer for a bit, don't worry. Your next salary increase will take care of that. After a few increases, you won't even miss the amout you are putting into the 401k.

Next, set up your emergency cash fund. This will be the savings account at your local bank or at work. This should have 3-6 months salary in it in case you lose your job. It can also be used for true emergencies such as the roof leaking.

Then, look at IRA's if you are eligible. You might automatically go for a Traditional IRA to get the tax deduction, but stop for a minute. You are already getting the 401k before tax. Look at the Roth IRA. This won't give you a tax deduction, but all your withdrawals down the road will be totally tax free (assuming you are over 59 1/2).

The interesting savings plan is the one you set up in your own budget. This is simply Pay Yorself First each month out of your take home pay. Set up a separate savings or brokerage account. Have your bank automatically transfer $100 per month from your checking to savings. This way you won't have to decide to do it each month. It will automatically be done. Once done, forget about this money an consider it gone.

How much will you have in your little savings account?

$100 per month deposit will grow to $69,636 in 30 years.

If you put your savings into a brokerage account, and make monthly contributions into high quality stock mutual funds, your money is expected to grow 10% on average per year over a long period of time. This is the historic average. If you do this, here is what your $100 will grow to after 30 years:

$100 per month deposit into stock mutual fund will grow to $227,932.

The numbers speak for themselves. So stop waiting for the end of the month until you see how much you can save. Put yourself first and save a certain amount automatically out of each paycheck.

Enjoy your retirement.