Author Topic: Pay yourself first...in practice  (Read 3200 times)

Bjorn

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Pay yourself first...in practice
« on: March 26, 2015, 09:14:01 AM »
How do you go about it?

This is what I've done up until now:
1. Get paid on the 20th
2. Transfer a set sum to bills account in which bills and student loans are paid from (25% of salary)
3. Transfer a set sum to savings account (50% of salary)
4. Spend whatever is left (25% of salary)

I am of course minimizing my spending as much as I can but there are months with unforeseen expenses. In these cases I "steal" from the savings account. I manage my savings from that savings account. I transfer to tax-advantaged accounts, e.g. you can transfer up to $6.5k annually to something called BSU in Norway which has 4.5% interest and tax cash-back of 20% of whatever is saved, but this money is locked and must be spent on real estate at some point. Once you spend it you're not allowed to continue saving in them.

I guess my question is this: how much money should I keep in that basic savings account (1.8% interest)? I have about $9k there now and it increases by $2k every month. Due to inflation (2-3%) I am losing money by keeping it there.

I already own 1 RE unit with a loan on it. My short term goal is to buy another RE unit which I need about $40k for in downpayment. This speaks for keeping the money in that savings account until I have enough. On the other hand my long term goal is to have at least $100k in index funds/stock market so I'm thinking I might as well start saving for that too. And the tax-advantaged accounts seems like a must because of their total yield. I'm 30 and am allowed to keep saving in them until 33.

Would it be wise to keep e.g. 6 months worth of savings in the savings account as a minimum, and then use the exceeds to invest in BSU and real estate, then once I have the RE start investing in stocks? The problem with this is that I will always have a lump sum of money lying around, which at times can be tempting to "steal" an extra $300 from when its time for holidays or xmas.
The other option is maxing out the BSU savings early in the year and transfer any exceeds into index/stocks, thus keeping my basic savings account at a minimum to avoid temptation and the annoyance of low interest.

I can't seem to agree with myself. How do you stay disciplined and never touch your available saving funds?
« Last Edit: March 26, 2015, 09:16:01 AM by Bjorn »

2Birds1Stone

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Re: Pay yourself first...in practice
« Reply #1 on: March 26, 2015, 09:24:45 AM »
I have

20% Pre Tax taken out for 401k
6% Pre Tax Taken out for HSA
$230 Auto deposited into Roth IRA on every Pay Day

Then I sweep funds from my checking account every few months into investments in lump sums as the checking builds up.

aneel

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Re: Pay yourself first...in practice
« Reply #2 on: March 26, 2015, 01:24:06 PM »
I have

20% Pre Tax taken out for 401k
6% Pre Tax Taken out for HSA
$230 Auto deposited into Roth IRA on every Pay Day

Then I sweep funds from my checking account every few months into investments in lump sums as the checking builds up.
+1 for the structure of things

rpr

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Pay yourself first...in practice
« Reply #3 on: March 26, 2015, 01:38:06 PM »
Deleted.


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hadabeardonce

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Re: Pay yourself first...in practice
« Reply #4 on: March 26, 2015, 02:54:53 PM »
I have

20% Pre Tax taken out for 401k
6% Pre Tax Taken out for HSA
$230 Auto deposited into Roth IRA on every Pay Day

Then I sweep funds from my checking account every few months into investments in lump sums as the checking builds up.

How often do you get paid?

2Birds1Stone

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Re: Pay yourself first...in practice
« Reply #5 on: March 27, 2015, 06:05:42 AM »
I have

20% Pre Tax taken out for 401k
6% Pre Tax Taken out for HSA
$230 Auto deposited into Roth IRA on every Pay Day

Then I sweep funds from my checking account every few months into investments in lump sums as the checking builds up.


On the 15th and the last day of each month. so 24 pay periods a year.
How often do you get paid?

midweststache

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Re: Pay yourself first...in practice
« Reply #6 on: March 27, 2015, 06:30:41 AM »
This is what I've done up until now:
1. Get paid on the 20th
2. Transfer a set sum to bills account in which bills and student loans are paid from (25% of salary)
3. Transfer a set sum to savings account (50% of salary)
4. Spend whatever is left (25% of salary)

I am of course minimizing my spending as much as I can but there are months with unforeseen expenses. In these cases I "steal" from the savings account. I manage my savings from that savings account. I transfer to tax-advantaged accounts, e.g. you can transfer up to $6.5k annually to something called BSU in Norway which has 4.5% interest and tax cash-back of 20% of whatever is saved, but this money is locked and must be spent on real estate at some point. Once you spend it you're not allowed to continue saving in them.

I guess my question is this: how much money should I keep in that basic savings account (1.8% interest)? I have about $9k there now and it increases by $2k every month.

So if I'm reading this right, your monthly allocation is approximately $1,000/bills, $2,000/savings, $1,000/spending? I think the answer to your question is to become more disciplined about allocating that $1,000 spending over the course of the month. I imagine, as you've already got bills taken care of, this spending is mostly on food and transit. Even in a HCOL, spending more than $1,000 on those things seems wasteful, unless you're a family of six. A breakdown of your spending might help this board in giving advice.

Would it be wise to keep e.g. 6 months worth of savings in the savings account as a minimum, and then use the exceeds to invest in BSU and real estate, then once I have the RE start investing in stocks? The problem with this is that I will always have a lump sum of money lying around, which at times can be tempting to "steal" an extra $300 from when its time for holidays or xmas.
The other option is maxing out the BSU savings early in the year and transfer any exceeds into index/stocks, thus keeping my basic savings account at a minimum to avoid temptation and the annoyance of low interest.

I can't seem to agree with myself. How do you stay disciplined and never touch your available saving funds?

Sounds like you'll have the discipline problem with both options. You have to learn to work within your budget and not see your savings account as your slush fund. Perhaps it means not putting as much away in savings right now. Perhaps it means following a strict budget on YNAB for a while. Perhaps it means cash envelopes (not my cup of tea, but people swear by it). Whatever.

I know there are people on this forum who look down at budgeting, because they naturally spend significantly less than they make. Whatever. Good for them. I like the discipline of a budget, and it holds me accountable (particularly through YNAB) for my savings goals.

Plus, you don't "never" touch your savings fund - you save it for a larger purchase, like the RE unit. Just remind yourself that every $300 you nip away is that much longer until your next RE unit, which, in turn, means longer until you have that much more income. You have to have the self-discipline to make those choices during traditionally spendy times (which is not easy, says the person who ordered take out for dinner last night).

Bjorn

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Re: Pay yourself first...in practice
« Reply #7 on: March 27, 2015, 08:14:01 AM »
Thanks for the advice.

My monthly cash flow looks like this (in a normal month):

Salary: $3,247
Bills: $844 (rent, electricity, internet, student loans)
Savings: $1.753
Left for spending: $626 (food, household, transport, entertainment, socializing).

Then there are not-normal months:
In May the salary is +100%, in which I keep the same budget and save the excess.
In December the salary is +25%, in which I keep the same budget and save the excess.
So on average the savings should grow $2k/month.

And then there are expenses that come up from time to time:
- Dentist appointment, which happens every other year maybe is $200.
- Wanted to help out a poor friend abroad with a small business loan ($500).
- Xmas gifts costing $200 instead of the budgeted $100.
- Renewing the laptop every 4-5 years ($600).
- New shoes $100 that overrides my set expenditure in a month.

Random stuff like that. And I am not overspending, I do look for versions of stuff that is cheap+quality taking into account durability, functionality and possible sell value. E.g. my shoes are $100 because I expect them to last at least 5 years and they are usable in 3 out of our 4 seasons. Better than buying 2 pairs of $40 shoes every year. Honestly speaking I don't know how much this totals up to on average each month, because many of these expenses don't even happen every year. I've started to take notes and so far come up with $60 every month in personal "depreciation" costs. I am including clothing, electronics and other long lasting stuff that I need that costs more than $50.

Like you say, discipline is key so I'm trying to figure out what can motivate me and stick to the plan, but also having a plan that actually works and is realistic. Maybe I should split my savings in two where 90% is untouchable long term savings and 10% is saving for those unexpected expenses? That way I would always have money for those and not needing to touch the long term savings. Again, the downside is the temptation of spending more than necessary from that "temporary" savings account. When you have $1,500 set aside for stuff like renewing the laptop its very easy to convince yourself that you need a $900 laptop instead of a $600 one and that you should renew it now instead of waiting 6 months. Maybe I still have a long way to go mentally here and not being as frugal as I thought I was and strive to be.