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Why Paying Yourself First Always Pays Off

If you’ve just moved to Los Angeles, saving for retirement may be the last thing on your mind.  When there are bills to be paid like exceptionally high rent, inflated food prices and even parking tickets, it’s hard to commit to the idea of putting money away. The fact is, however, if you’re under the age of 25, time is truly on your side and deciding to invest today could do wonders for your bottom line. So, Survive the City wanted to provide you with a little motivation and a little information.

First, the motivation:

In order to maintain one’s current lifestyle during retirement, someone who starts saving for the first time after the age of 30 must save 15-25% of her income, whereas someone who starts saving in her twenties need only save 10-15% of her income. Point is – the sooner you start, the less you have to put away to get to the same goal number.

You’re going to need at least 200-300k to buy a house in Los Angeles – and that’s a one or two bedroom, one bath fixer-uper in the worst part of town, on a good day, while the economy is bad. Just think what it will take to buy that house in the hills!

If you’re under 30, you have a great opportunity to lock in a low savings percentage, because you’re in the best position to take advantage of potential long-term returns on your investments.

If you’re under 40, even if you cannot afford to put 15% to 25% of your income into retirement savings, get started with whatever  you can afford because every day you procrastinate means a bigger struggle down the road to maintain the same level of living standard.

Now for some how-tos:

To start, take advantage of your company’s 401k or IRA plan. Reality Check: okay, I’m sorry I depressed you

with that last part. 401k plans for someone living and working in LA!!?? In our dreams! However, if your company doesn’t offer one, you can still create one for yourself. Check out Fidelity, for example, and set up a roth IRA.

You can currently (2009/2010 stats) contribute up to $5,000 to your Roth IRA and it won’t be taxed!

More motivation: If the motivation above wasn’t enough, check this out: According to Kiplinger.com “If a 25-year-old contributes $5,000 each year until she retires and makes an average annual return of 8% on her investment, she’ll have $1.4 million saved by the time she retires at age 65. And the money is all hers — she won’t have to give the IRS a cent of it if she waits until retirement to withdraw the money.”

Pay yourself first. Set up an auto-withdrawal with your bank account which will take a certain amount of money each day/week/month (you decide) from your checking account and deposit it into your savings/roth IRA/Mutual fund. This way, you don’t have to think about it and you don’t have to force yourself to put money towards something that, for the time being, doesn’t feel gratifying. Paying yourself first even means delaying other types of payments, if necessary, in order to make saving a priority. Now,we aren’t suggesting you run up a huge credit card debt because you’ve got a shoe habit (that requires an adjustment of spending habits) but we are saying that savings should happen first, not just when you have “leftovers” from your paycheck.

Keep track of your spending in a way that works for you. Then question certain elements of your budgetary habits. Can you cut back? Do you really need to spend $3 per day on a double iced vanilla latte? If you do, here’s a Survival Tip: Buy a regular iced coffee and ask for space for cream, plus a flavor shot of vanilla. Then, fill the space with half and half. It’s so similar to an iced latte, with less calories and less cost.

Consider bonds and cds. If you have “saved up cash” that you don’t need anytime soon, and you’ve maxed out your Roth IRA, consider purchasing a bond or a cd.  It’ll add to your portfolio without feeling as risky as buying stocks. - Heather Broeker

This entry was posted on Monday, August 9th, 2010 at 9:56 pm and is filed under Career in the City. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.