Dear Dr. Don,
You often advise readers to “pay yourself first.” It sounds like a fine idea. But I’m wondering how that actually should work. I’d like to know how much or what percentage of my income should be set aside to pay myself first.
— Paul Payday
I’m not sure what you were reading, but Paula Pant wrote on this topic in Bankrate’s Saving Money Blog in a post dated Sept. 18, 2013. You might check out her post. But here’s my take on investing in yourself. It’s the financial version of “looking out for No. 1.”
Consumers are constantly making spending and investment decisions about how to handle income and assets. Most people invest to meet their anticipated financial needs and spend to meet current needs. If you pay yourself first, you’d be making investing the top priority over consumption.
To help decide how much to invest or save, you’ll need to get a handle on your future life and financial goals. Whether it’s the need for retirement income, college costs for your children or a second home, the goals all need funding.
It’s not a perfect measure for everyone, but I’d estimate that one-third of an individual’s income goes to taxes, one-third goes toward shelter, which leaves the remaining one-third of your income to meet current consumption and investment plans.
To help you do the math, if you split the final one-third in half you’d be saving 16.67 percent. But that will only work if you can meet your current consumption needs with a relatively small slice, just 16.67 percent of your income.
I like to see more people strike a balance between consumption and investing. Delayed gratification can help you meet your future financial goals, despite the perception that you’re limiting your ability to enjoy life today. You risk limiting your future financial well-being by being burdened with any interest charges and carrying credit card balances. In that case, your choices could be extremely limited down the road. We’re hoping you’ll do what’s needed to avoid that.
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