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Have you ever heard someone
say, "If I could only make more money, then I could really start to become
a saver, or maybe even an investor"? Perhaps you've even said something
like that yourself.
If so, you may have been mistaken. Making more money won't necessarily make you
a better saver or investor. Look at the newspapers-virtually every day someone
famous, someone you or I might reasonably regard as a huge money earner,
declares bankruptcy.
Larry King, Francis Ford Coppola, Debbie Reynolds, Redd Foxx, Dorothy Hamill,
Wayne Newton, Susan Powter, Burt Reynolds. Do you know what they all have in
common? Aside from being famous, they have all filed for bankruptcy. So
did 1.4 million other Americans in 1997. That represented a nearly 20 percent
increase in bankruptcy filings in just one year! What accounts for this
epidemic of insolvency? Well, among other things, Americans have become
addicted to spending money by using "plastic cash." In 1997
consumer debt hit a record $1.25 trillion! Which leads me to suggest
It's
time to keep more . . . and spend less.
The reason most people fail financially is not because
their incomes are too small but because their spending habits are too big. In
other words, they spend more money than they make. This may sound awfully basic,
but it's true. If you spend more than you make, you always will be in debt,
always stressed, rarely happy, and eventually poor or bankrupt.
Controlling your spending, though, isn't all there is to being a Smart Woman and
finishing rich. You also must make a point of saving a portion of every dollar
you earn. No matter how large your paycheck is, if you don't save, you will
never live a life of financial abundance.
Whether you are a highly compensated doctor or lawyer supporting mortgages on
two homes or a more modestly paid teacher, office worker, or sales trainee who
barely makes the rent each month, the key to financial independence can be
summed up in three little words . . .Pay yourself first.
Why in the world would you work 40 (or 50, or 60, or more!) hours a week, and
then pay someone else first? Search me, but most Americans pay everyone else
before they pay themselves. Most of us pay the IRS first (through our
withholding tax), then our mortgage or our rent, then our utilities, then our
car payments, then our VISA or American Express bills, and on and on. If by some
miracle there is something left over after all those payments-meaning there have
been no "Murphy's law" disasters, like the car breaking down or the
washing machine dying-then maybe (and I mean just maybe) we might manage to put
away a few dollars for our future.
Whatever You Do, Don't Pay Uncle Sam First!
Of all the crazy things people do with their money, the one I really can't
fathom is paying their taxes before they pay themselves. Not even the government
expects you to do that. If the government did expect to get paid first, it
wouldn't have enacted laws to that allow us to put part of our earnings into
retirement accounts such as IRAs and 401(k) plans before the tax man takes his
cut. This is called "pretax" investing, and it is the single smartest
thing you can do to build wealth.
Unfortunately, millions of Americans don't take advantage of pretax investing.
Instead, they let state and federal tax authorities funnel off as much as 40
percent of each paycheck-that's 40 cents out of every dollar they earn-before
they even get to see it. This is a huge mistake. The government really does want
you to have financial security-so much so that it's willing to give you a break
on your taxes if you use part of your earnings to fund a retirement account.
Whatever you do, don't pass up this break. You've earned it!
THE 12 PERCENT SOLUTION
So what does "pay yourself first" mean? It means that whenever you
make any money, no matter how much or how little, before you spend any of it on
anything else, you should put some of it aside for your future.
Now, when I say "before you spend any of it on anything else," I mean
anything else. That includes your rent or mortgage, your credit-card bills, even
your payroll withholding tax. Ideally, you should pay 12 percent of the
gross-meaning your total earnings before taxes-into some sort of retirement
account that you will never touch until you actually retire. Of course, it's
possible that because of how much you make or the kind of retirement account you
have, you may not be eligible to put that much into a pretax retirement account.
In that case, you should make up the difference by putting money into an
after-tax account.
Why do I suggest putting away 12 percent of your gross income? Well, for years
the financial experts have been suggesting that to prepare properly for
retirement, everyone should be saving at least 10 percent of what he or she
makes. Of course, when they say "everyone," the experts are really
talking about men-and in this case, at least, what's good enough for men isn't
necessarily good enough for women. After all, women live longer than men-and as
a result, they need to put away more money for their retirement. How much more?
Well, if women's retirements tend to last 20 percent longer than men's-and
that's what the statistics tell us-then women's retirement nest eggs need to be
20 percent larger. In other words, if the experts say that men should be putting
away 10 percent of their pretax income, then as a woman you should be putting
away 12 percent of yours.
Now, I realize that saving 12 percent of your income may sound like a lot. But
believe me, it's not as hard as you might think. The trick is not to let the
figure overwhelm you. Rome wasn't built in a day, and neither is a new financial
future. If you can't imagine saving 12 percent of your income right now, then
start with 6 percent and make it a goal to bump up your savings rate by 1
percent a month for the next six months.
If even 6 percent seems like too much, do what I often suggest to clients of
mine who really have a problem with the idea of saving. Start off putting away
just 1 percent of your income. (I have never met anyone who could look me in the
eye and tell me they couldn't save 1 percent of their income.) Then increase the
amount by 1 percent a month for a year. At the end of a year, you will be saving
12 percent of your income and you will barely have noticed the difference.
It's a lot like getting in shape to run a marathon. People who train for a
marathon don't say to themselves "Today I think I'll run a marathon"
and then go out and run 26 miles. They start off running a block, then 2 blocks,
then a mile, then 2 miles . . . until one day they are running 26 miles (and are
actually enjoying it). Think about your goal of saving 12 percent of your income
the same way. Day by day you are striving to become financially stronger. Before
you know it you will be in great financial shape!
What About the Real World?
Paying yourself first is one of those concepts that strike a lot of people
as sounding great in principle but having very little application in the real
world. And I wouldn't be at all surprised if right now you are thinking “Sure,
I'd love to pay myself first.” Just tell me where I'm going to get the
money.
Well, I'll let you in on a secret: You already have it.
That's right. No matter how much or how little you earn, you already make
enough money to pay yourself first. Your problem-and it's not just your problem,
it's almost everyone's problem-is not that you don't make enough, but that you
spend too much. Learn to control your spending, and everything else will
fall into place.
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