Episode #2- Paying Yourself First

Wealth Decisions Podcast Transcript for Episode #2- Paying Yourself First

Listen to this episode on Apple Podcasts or Spotify

One of my favorite self-development individuals is a fellow by the name of Jim Rohn.

He's no longer with us, but he is still probably the most quoted self-development gurus of his generation.

He used to say a quote that always stuck with me.

Without a future well-defined, we take hesitant steps.

This episode, we're gonna be talking about wealth decision number two, and it's a really crucial decision that you need to make in order to have financial independence or financial freedom.

And that decision is paying yourself first.

You know, many individuals pay their bills and then they invest if there's anything left at the end of it all.

A better wealth decision is to pay yourself first, and that's putting a percentage of your money away before you pay your bills.

And that might mean putting away at least 10%.

Maybe it's 20% or 30% if you want to achieve financial independence or financial freedom.

I'm very fortunate that I had a father who preached this methodology constantly to my brother and I.

I wouldn't be in the position I am today without adopting this mindset.

And paying yourself first can really set you up to achieve a richer life now and in the future.

What paying yourself first doesn't mean is buying things for yourself, like MC Hammer did in the 90s.

MC Hammer at one time had $70 million to his name at the peak of his career.

But instead of putting away money or investing, he bought more than 17 luxury cars, a private jet, two helicopters, and for some reason, he thought he needed 21 race horses.

He filed for bankruptcy in 1996.

Paying yourself first is about putting a percentage of your income away and investing in that money for the future.

And always remember that part of paying yourself first should be to put some money away into an emergency account.

You should aim to have at least six to nine months of after-tax expenses in some type of emergency fund.

So if you make $7,000 after-tax, and that's what you need to live comfortably, you should have a minimum of $40,000 in an emergency account.

And then investing the rest of that money in some type of ETF or mutual fund in growth investments.

You know, I get asked all the time, where should I be at my age?

How much should I have saved?

And this is really a big question and it's obviously different for everyone, but there's a path you need to be on.

So I wanna talk a little bit about where you should be if you're in your 30s, 40s or 50s.

If you're in your 30s, you're most likely juggling some responsibilities.

Maybe you're starting a family, buying your first home, but it's crucial to balance those short term goals with some long term financial planning.

You know, make sure you have a good budget.

You know what you're spending and where you're spending it, and purchasing life insurance, things like that.

You should be on your way in your 30s to having close to 150,000 saved towards your mid or late 30s.

Now, if you're in your 40s, you're in a different career path.

Maybe you got some raises, and you should be more in your prime earnings years, and more able to put away money at this point in your life.

As a general rule of thumb, you should have saved at this point in your 40s about three times your salary towards retirement.

So if, for example, you make $150,000 a year, you should have somewhere anywhere from 400 to 500,000 in retirement accounts in your late 40s.

Now, if you're in your 50s, you know, retirement's drawn nearer, especially if you want to retire early.

This is a critical time for financial planning.

Maybe you haven't saved what you should have been saving.

Maybe you feel like you're a little behind.

But the good news, when you're over age 50s, there's catch-up provisions in your 401Ks and IRAs and Roth IRAs to help you get back on track.

As a general rule of thumb, you should have saved at this point about six times your annual salary.

Using that same example of making $150,000 a year, you should have somewhere saved close to $800,000 to $900,000.

And if you're not there yet, you obviously can save more in your retirement accounts using those catch-up provisions.

When I say these numbers, like I said, it's different for everyone.

So don't get discouraged if you're in your 30s, 40s, or 50s, and you don't have those amounts saved.

I'm going to look at some examples for you here of starting late.

Looking at a couple age 45 that haven't saved much for retirement, and they make a joint income of $200,000 per year.

And we're going to assume an 8% rate of return and then a 4% withdrawal rate at retirement.

So we're going to look first at someone who was focused on saving 10%.

Their goal is to achieve financial security.

So they saved about $20,000 a year, about $1,600 a month.

And by the time they're age 65, 20 years later, they will have accumulated about $1.4 million.

The potential financial security income with that type of asset base is about $4,500 a month.

Now let's look at financial independence.

They wanted to save more.

They were able to do it.

They figured out a way in their budget to be able to save 20%.

So each year they save $40,000 in different retirement accounts and taxable accounts.

So they saved about $3,300 a month.

And by the time they were $65,000, they accumulated about $2.9 million, assuming an 8% rate of return.

And using that same 4% withdrawal example from the financial security example, they were able to create about $9,500 a month before tax in retirement income.

Now let's look at someone that wanted to achieve financial freedom.

This couple was able to put away 35% per year, assuming they made $200,000 a year like the first two examples.

They were able to save about $5,800 a month.

And by the time they were $65,000, they accumulated about $5 million, assuming an 8% rate of return.

And using that same example of a 4% withdrawal rate, they were able to take about $16,000 per month in before tax income.

So it's never too late to get started.

You just have to figure out what is important to you.

Is it financial security?

Do you want financial independence?

Or do you want true financial freedom, where you have a lot of choice to do the things you want to do?

I used a 4% withdrawal rate in these examples because that's really the safe withdrawal rate that you should take in retirement.

But you can take up to 5% and still have your money grow over time and hopefully give you pay raises.

But a financial plan is not just something simple like this, where you put in an average rate of return and look at a 20-year period.

There's a lot of other things that need to be factored in the equation.

And that's why having a good financial advisor that focuses on financial planning, because they're going to look at inflation, they're going to look at taxes, they're going to look at the different accounts you have in terms of creating a tax-efficient income.

But one thing to keep in mind is the 5% withdrawal rule.

The general rule of thumb, when it comes to taking an income in retirement, is for every $250,000 you have invested, that equates to about $1,000 per month in income.

So if you need somewhere around $4,000 a month in income in retirement to supplement your other income sources like Social Security, and if you're lucky to have a pension, then you're going to need close to $1,000,000 invested.

It all depends on your lifestyle, your goals, maybe your debt situation.

A lot of people want to have their home paid off, which will drastically reduce their expenses.

So it's different for everyone.

You might not need a million dollars to retire if you live well below your means and don't want to do a lot of lavish travel and spend a lot of money.

I always say once you're frugal, you're always going to be a frugal person.

You're not going to all of a sudden just start spending lavishly in retirement.

If you'd like to play around with some different scenarios, I do have some great tools on my website at www.momentouswealthadvisors.com backslash tools.

You'll find a financial freedom calculator that looks at paying yourself first, what that would look like for your budget.

I also have a calculator that you can put in different amounts that you could potentially save per month, different interest rates.

I'd suggest keeping it around 8 to 10 percent just to be realistic.

But it'll show you instantly if you invested a certain amount, what you potentially would have 15, 20, 25, 30 years from now.

And of course, if you haven't started working with a financial advisor, I'd suggest looking for a fiduciary advisor, one that is obligated to put your interests first and one that has a predominant focus on a financial planning first approach.

And once again, thanks for listening to The Wealth Decisions podcast, episode two, Paying Yourself First.

If you'd like to schedule a discovery call with me, you can go to my website at momentouswealthadvisors.com and I'll spend some time to get to know you a little bit and find out if I might be able to steer you in the right direction or help you with your financial future.

Listen to this episode on Apple Podcasts or Spotify


-Brian D. Muller, AAMS® Founder, Wealth Advisor

Momentous Wealth Advisors in a fee-only fiduciary advisory firm

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