Step 7: Pay yourself first

Raise your hand if this was your reaction to the title of this blog post: “Yes, I get the concept of paying myself first, but after taxes, mortgage/loan payments, credit card payments, and life expenses, there’s not really that much left.”

That was my reaction, and I’m betting at least some of you had a similar one. I have always said “I’ll start saving seriously, once I pay off my student loans”, or “this month was a really expensive one, but I’ll save some more next month.” Of course, with that approach, I never saved anything substantial.

Then I came across this worksheet from my new favorite author, David Bach.

It’s a bit difficult to read in this image, so make sure you download it from the link above.

This worksheet flipped my savings model on its head. David basically says, put 12.5% of your income into a pre-tax retirement account, and at least 5% towards your emergency fund / dream account, before you pay any of your other bills.

Mind. Blown. Once I flipped my approach, I found I was able to put away a whopping £1,500 per month, and STILL overpay on my student loans so I can get them paid off within the next two years. While I was tempted to put even MORE towards my loans, building that spreadsheet in the previous step showed me that by diverting more money to my savings, I can also stay on track to meet my other goals (emergency fund, down payment, and enough vacations to keep me sane).

One of the big “ah-ha” moments for me was the pre-tax retirement account. I’ve never thought that much about retirement savings, because my company puts the equivalent of 12% of my income each year into a retirement account for me, without me having to do anything. I always thought: “well, at least that’s covered.” But then I realized that, since the money isn’t taxed before it goes into the account, I can actually save more, in absolute numbers (duh, Kate). And as I’ll write about in a later post, I learned that if I put aside even $350 into my retirement account each month, I’ll have a million dollars by the time I’m 65. If I double it, I’ll have lots more. That’s a pretty good incentive.

The other effect of flipping my savings plan on its head is that I’ve had to be more mindful of my spending. I’m continually economizing on the margins – public transport instead of taxis, cooking meals rather than eating out, ditching those £20 yoga classes to do some poses at home. Everyone will have their own tradeoffs (I’m still digging my heels in and sticking to my 2BR flat in Marylebone), but setting a budget and tracking it with an app has really opened up my ability to save for my bigger life goals.

I’m not at that 12.5% target for retirement savings yet – I’m only at 7% – but I might take on David’s challenge of increasing it by 1% per month and seeing if I can find that extra 5%.