A Modern Twist On Paying Yourself 1st!

We all do it. I can remember as a child being warned by my mother about the dangers of it, so it’s nothing new. Advertisers and marketers are counting on it. Amazon built an empire on it. We all put off future rewards for instant gratification. Its always more gratifying to have something shiny and today rather than save for some vague future time when we will need to live off the fruits of our savings. Yet for most of us, saving over long periods of time is the only way to achieve real wealth. If you recently won the Powerball you can stop reading now. For the rest of us, let explore this!

retirement savings = compounding & time

You probably know that you’ll need a lot to retire. Truth of the matter is that you probably need a lot more than you think.  Forget the old adage that people spend less in retirement. According to a recent study reported in the Wall Street Journal, most people will spend more – a LOT more – when they retire.  Saving for retirement isn’t hopeless and it isn’t magic but it does take discipline. Assume for a moment that Jessica is a 26-year-old recent vet school graduate. She knows she wants to have $1million when she retires. How can a veterinarian ever save  $1million? Well fortunately she doesn’t have to save $1 million. By putting away $503 a month she will have saved just $241,440 over the course of her career; however, if she earns a (very) reasonable 6% that $241k will blossom into $1million.

Look at the chart above – the blue line is what Jessica saved the red line is savings plus her earnings. See how 40 years turned $241,000 into a million dollars? It’s not magic – its just compounding of money over time. But what if she waits a few years, after all, there are student loans to pay and a house to buy. If Jessica waits until she is 30 to start saving she will need to put away $702 a month and if she waits until age 35 she will have to put away $1k a month to reach her goal. The less time money has to grow, the more of it Jessica will need to save. The moral of this story for Jessica and the rest of us is: start saving now! (For those interested in making their own projections I have written this tutorial).  But how best to ensure that we actually make these monthly investments in our future? It comes back to piece of advice my parents gave me: pay yourself first. Honestly, when I was first starting out I had no idea what this meant, but let me explain. Imagine a monthly budget. At the top of the budget are the essentials – the payments that must be made. There are probably student loans and rent or mortgage. At the bottom of the list are the non-essentials like movies and dinning out. Even before the essential payments at the top you should have a non-negotiable entry for savings – you pay your future self before anyone else. How to accomplish this? Well, one way is robo-investing.

What is robo-investing?

If your employer has a 401K or some other retirement plan then you are already familiar with the concept. Each month, the payroll company takes a set amount of your income  – before it ever hits your checking account – and invests it for you. But what if you don’t have a 401K at work – or you want to save for other things? For example, I recently purchased a house. In an earlier post I wrote about how homeowners should save 1% – 3% of the value of a home each year for expected maintenance. My home is relatively new and already I’ve had to replace a dishwasher and the front gate needs repair. I use a robo-investor app to automate this and other savings. Essentially, every week the app takes money out of my checking account and invests it for me. I don’t have to do anything – it just happens. There is money for home expenses, tuition and other things I save for and it all comes right out of my checking and into a managed investment account. When I needed money to pay for new dishwasher, I just logged into the app and the money was deposited right back into my checking. This app is the new 1^st line on my budget. It insures that I pay myself 1^st no matter what Amazon tries to convince me I might need.  There are more than a few robo-investing apps. I use Acrons – but others include Betterment,, Wealthfront, and Stash. There may be more. A nice review of these can be found here.

For generations, investors have known that instant gratification is the enemy of savings. Just as “old fashion” and accurate is the idea that paying your self 1st is the key to future wealth.  In previous generations this meant putting savings as the first item on a budget. Today, robo-investors can help automate wealth generation as well as savings for other expenditures.