Grandpa taught this to Dad. Mom heard it from her mother. And no doubt some version of this piece of wisdom was passed down to you by a loving parent or other relative: Out of every paycheck, before you even pay your bills, set aside money for savings and for your rainy-day fund.
With food and gasoline prices so high it may seem more difficult today to put good savings habits into practice, but Pay Yourself First is every bit as good an idea now as it ever was.
In fact, financial planners advise having a minimum of three months' take-home pay in an emergency fund. That way, if little Jimmy needs to visit the emergency room after T-ball practice the same day the refrigerator goes out, you've got a fighting chance of never having to meet me.
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Congress takes the Pay Yourself First idea to an even higher level by protecting retirement savings from tax. When it comes to IRAs, Roth IRAs, Simplified Employer Pension Plans, 403b plans, and 401Ks, there is no taxation on the money while it's accumulating for retirement. The fact that many employers add money to employees' 401K accounts makes these plans even more attractive. Whether you make a voluntary contribution through payroll deduction or whether your company contributes money to your retirement account, it all goes in pretax. For most people, that's the equivalent of getting $100 worth of retirement savings for a cost of $70-a great bargain by anybody's standards.
To prepare myself to give the most up-to-date financial advice to my bankruptcy clients, I read a lot of different journals. One thing I like to read about is court cases around the country as well as here in Indiana where I practice. A couple of weeks ago, I learned about a very interesting court case in Massachusetts that relates to the theme of retirement savings.
The story had to do with a woman who had filed a Chapter 13 bankruptcy. Under bankruptcy law, a Chapter 13 plan means that the debtor makes regular debt repayment every month for three to five years under the supervision of the bankruptcy trustee. That's what this woman was doing. At the same time, she continued to make contributions to her 401K plan at work.
You might think the court would have ordered her to put off saving for her retirement until she'd finished paying off her debts. Instead, the court ruled she should be allowed to "pay herself first" by saving for retirement!
So, not only was this woman able to make tax-advantaged contributions into her 401K, here we see the court following a policy of protecting a person's right to save for the future, even when that has the effect of slowing down the repaying of debts. The purpose behind the court's ruling was to help set this lady up for a fresh start after completing her bankruptcy plan.
For me, as a bankruptcy attorney, this means the bankruptcy court system is functioning as a safety net and as a way to give people a chance to rebuild their financial lives after a difficult period. But even if bankruptcy is very far from your world, this story should really make you think about the importance of saving for your own future and motivate you to do something about saving for yourself and your family.
Ask yourself: Am I leaving me for last, or am I Paying Myself First?
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