Paying yourself first (saving and investing each month before living on what is left over) is a popular but seldom practiced concept. I love the principle, but, for followers of Christ, I would modify it by stating that we should pay ourselves second after we give to God. The three money management priorities for believers, therefore, are:
- Give to God.
- Pay yourself (save and invest).
- Live on what you have left.
Simple enough, right? But simple doesn’t equate to easy, and, unfortunately, many have it upside down: living life first, then giving and saving if they have anything left over.
Because ChristianPF has many great giving/tithing articles, I will focus on the second priority – paying yourself: specifically, building an emergency fund and investing for retirement.
Paying Yourself an Emergency Fund
How do you cope when your air conditioner goes out or your car’s engine decides to give up the ghost? Even more importantly, how would your family survive if you or your spouse lost your job? Because (according to the Wall Street Journal) seventy percent of you are living paycheck to paycheck, there is a good chance you aren’t prepared.
You need at least three months of monthly expenses set aside for emergencies, but most financial advisers recommend six or even twelve months. Anything less is a life of constant stress.
Paying Yourself a Retirement Fund
As a rule of thumb, you should have, at retirement, a nest egg of at least 20 times your current annual salary. Yes, you read that correctly . . . your retirement fund will need to pay your living expenses for all of your retirement years (20 to 30 for most people) while keeping up with inflation.
I am amazed at how many people in their thirties, forties and even older have made no plans for retirement. Newsflash: you WILL grow old unless you die first. You have no other options.
How to Make it Happen
Hopefully, I have ratcheted your anxiety level up a few notches. Good! Now . . . use that emotion to re-prioritize your finances. “Where,” you ask, “is this money supposed to come from?” Great question with a simple answer: quit giving your money to others (i.e. get out of debt). How much are your car payments, student loan payments, credit card payments and other ongoing debt payments?
If you are ever going to start paying yourself, you need to attack that debt first. Consider setting a time goal, such as two years or less. Will it be easy? Probably not. You may need to work another job, fore-go vacations, quit eating out and drop your cable TV, but you cannot break old habits by fine tuning them. You need to get radical, and doing so will pay huge dividends. If, for example, you have been paying others $800 every month, paying yourself that amount will give you a $20,000 emergency fund in two years; investing that $800 every month could give you a million dollars toward retirement in another 28 years.
Helpful Hint
Arrange your budget format to match your priorities, (Giving, then Saving, then other budget items) as in the following top few rows of the budget form I use. By prioritizing your giving and saving, you will learn how much money you have left to live on. If there simply isn’t enough, don’t despair. It may take some time, but plan on incrementally bumping that giving and saving until you get where you want to be.
So . . . what are you going to do? Keep paying others or start paying yourself? The choice is yours!
How do you currently prioritize your finances? What would you like those priorities to be? Do you have a plan to get from where you are to where you want to be?
{ 9 comments… read them below or add one }
I have to be honst, I liked that my wife and me paid our debts off first. Now I feel no guilt about taking the money we get and putting it nearly all into retirement, etc. But it may have been useful to start putting that money towards retirement earlier, for the sake of making money off that money.
TB — I totally support paying off your debts before focusing on your savings. In fact, I would include that as a subcategory of paying yourself. After all, you used the new cash flow from your former debt payments for retirement. Stated differently, you (like many people) need to get your debts paid off before you have the cash flow for saving and investing. My priorities could be:
1. Give to God.
2. Pay yourself
Sorry…I entered the above comment before I meant to. Anyway, those priorities could be
1. Give to God
2. Pay yourself by getting out of debt, saving and investing.
3. Live on what is left over.
My husband and I have just begun to get “radical” about paying off our debts – the first thing we did was get rid of cable, not lock into a new cell phone plan and started aggressively paying extra on one of our cars. Our goal is in 2 years to be debt free (besides the house which will be paid off in 12 years if we don’t pay anything extra). The next goal after that is to wipe out the mortgage. It’s required sacrifices – we’ve given up some things, but it’s really worth it. I’m a stay at home mom and have been for some time, but my husband has a 401k and also he works at an ESOP company and is fully vested (at this point if he retired today – we are in our mid 30′s) the ESOP payment would pay off the house).
My question is do you suggest setting up an emergency fund before or after the debt is paid off and before or after the mortgage is paid off? I’m not sure what the right move is after we get rid of most of our debt.
Thanks,
Stephanie
Stephanie – Way to go! I love your zeal in getting out of debt, and I love the fact that you and your husband are on the same page. You ask a great question about the order of: emergency fund – debt reduction – mortgage reduction. Here is what I use (from the Dave Ramsey Baby Steps):
1. $1000 emergency fund. Just enough to help with small emergencies while you are attacking your debt.
2. Pay of all debt except the house. I love the fact that you have set a two year goal!
3. Fully funded emergency fund. In your case, with one income earner, you should plan for at least six months of expenses. But, because you are no longer making debt payments, your positive cash flow will allow you to build that emergency fund much faster.
4. Invest for retirement. Your goal is 15% of your income.
5. College saving/investing for your kids. Use cash flow above the 15% you are investing toward retirement.
6. Pay off home early. Use cash flow above steps 4 and 5.
7. With steps 1 – 6 in place, you can continue to build wealth and/or be very, very generous.
Thanks for this article. I will set up an a savings account for emergencies. However, for retirement I intend to invest in ventures (e.g rental houses) that will give a considerable monthly return. This together with pension benefits would suffice.
Thank you
Joe,
Thanks for your encouraging words and much needed message.
In retirement, would the priorit be emergency fund, debts? I read somewhere that even retirees should invest in Roths or something.
Desert — Priorities in retirement are not greatly different than those before retirement. I would still emphasize getting out of debt and building an emergency fund, whether I was 30 or 70. Once the debt is gone and the emergency fund in place, I would continue to invest if I had the cash flow. Less risk as one grows older (unless you can afford to lose the investment), but consider this: a healthy 65 year old will realistically live another 20 or 25 years … plenty of time for the ups and downs in the stock market to balance out.