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March 23, 2011

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My wife and I heard about "Pay Yourself First" decades ago when we were raising our three children. When we would sit down at the kichen table in 1960 and work out our finances for the month it was with great satisfaction that we mailed off a good sized check to a mutual fund company along with our mortgage payment and all of our other bills.

Today our mutual fund accounts are close to $7M and growing nicely.

Don't get me wrong - there is no substitute for starting the compounding of your savings at the earliest possible age, however there is another very large financial item that we both benefited greatly from which many FMF readers today cannot count on. That item is a "RETIREMENT PENSION".

My pension was non-contributary and after a 32 year career amounted to 40% of the salary I was earning when I retired in 1992. My pension is fixed.
My wife's pension was contributory, it increases every year, and is now, after a 17 year career, is equivalent to 87% of the salary she received when she retired in 1993.

Those two pensions in addition to our two SS checks are more than enough to live on, especially when you are debt free and the result is that we do not have to tap into our IRAs and Trust account for living expenses.

My company no longer provides pensions. My wife had a 6 hour/day part time job with the school district and part time pensionable jobs are no longer available so pensions are disappearing fast unfortunately.

There was an interesting roundtable discussion last night on Charlie Rose on PBS. The guests were the mayors of about eight of America's largest cities, including Mayor Bloomberg of New York. They all made the point that pensions are killing them financially for two reasons, (1) the pensions were far too generous in the first place, and (2) people are living much longer these days. Bloomberg made the point that they are spending 40% on the elderly and only 10% on the youth, a direct result of all the cuts in education funding. He also reinforced the point that Social Security and Medicare have huge unfunded liabilities going forward.

I know what you're trying to get at, that setting aside money for investing should be a high priority. Nevertheless, paying yourself before you pay the mortgage, the light bill, or buy groceries is just going to result in you being homeless and hungry.

CJB --

You need to set up your finances so you can pay yourself first, pay all your bills, and (gasp!) even have some left over. ;-)

Absolutely pay yourself first. No doubt. Focus on your needs now, and your needs later. Many people make the mistake of connecting today's cash inflow with today's needs. Rather, think from the perspective of today's cash inflow paying for today's needs AND the needs of old age. You may not have the opportunity to make money when older. Do it now, take care of needs now.

Does this article say how to invest the money that is in your taxable investment account? I wasn't sure when I read it. Are you supposed to invest the bulk of your funds in a balanced fund - or just the portion you designate as your emergency fund? I like this idea. Reminds me of the line of credit mortgages that are popular in Australia - draw out just what you need to live on.

I'm just suggesting that I will always pay my mortgage first. As a thought model to encourage saving for retirement it's useful, but when you're actually running things it's bills, then investing, then wants. I think it's just that most people classify their wants as needs so what you're really saying is pay yourself before consumption spending but that's a bit of a mouthful so it gets expressed shorthand.

I really like this idea. Instead of relying on my will-power to transfer excess money to savings and investments, why not flip flop where the bulk of our income sits? I can definitely see it being harder to fritter away "extra" money if I'd have to make another transfer to a checking account to access it.

CJB,
I think you're right, that in any immediate sense its best to pay bills then save money. But I think the deeper point is that if you can't save based on the monthly expenses you face, then your monthly expenses are too high, and need to be brought down, or your income increased-so, move to a cheaper place, cut out 'extra bills' like cable, and/or find someway to grow your career.

Am I missing something here? The author states,"Make sure the transfer matches the amount you have allocated in your budget, ideally 65% or less of what you need to support your lifestyle. The other 35% should remain in your joint taxable account, much of it to be invested."

He then lists out the following:
* 10% emergency fund
* 5% taxable savings
* 10% retirement accounts

That's 25%, not 35%. Where is the other 10%?

Jason --

"10% you have designated for unknown unknowns"?

Did I miss it in the article...are these after tax or pretax percentages...just curious.

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