The typical scenario is that you get your paycheck. After you recover from the shock at how little is left after taxes, you proceed to divvy it up among all your outstanding bills, intending to put whatever is left over into your savings.
But there never seems to be anything left over and your savings don’t grow.
A better plan would be to pay yourself first. Don’t let the money get into your hands.
You might find that you actually begin to grow your savings much quicker this way.
If you work for an employer with a 401K plan, the first thing you should do is to fund it to the max. If you can’t afford that, at least put enough in to get the full matching contribution form your employer.
This investment is made before taxes. Your investment is larger and with the employers contribution grows quickly.
Next have a brokerage or mutual fund company debit your banking account monthly. This money should first go into an IRA – if you have five years or more to go to retirement, make it a Roth IRA.
Next have a few dollars more be debited to go into a no-load, low cost mutual fund. The younger you are, the more aggressive your choice of fund can be.
After that is done, then figure out how to pay your bills and living expenses. If money is tight, cut back on your living expenses and use the extra money to pay down your debt.
Start with the lowest balance first. Once that debt is paid, take the amount of money you were paying on that debt and add it to the payment on the next lowest balance debt. Continue doing this and you can be totally debt free within 5 to 7 years.
Another version of this method is paying the highest interest rate debt first. The principal is the same, you just see more progress with the first method, although it could be more costly based on how your debt is distributed.
(If you don’t believe me, get the premier version of Microsoft Money or Quicken and use the “Debt Reduction” module. You will be shocked at how much money you will save and how fast you can eliminate debt this way.)
The idea is to scrimp at the expense of your current lifestyle, while leaving your savings to grow and you debt to shrink.
I know many of the people reading this will scream that this is an impossible plan.
But it is quite doable with a little will power and the ability to delay gratification for a while.
The problem is that if you don’t do this, your future might turn out to be very bleak.