Pay Yourself First or How did you create a savings plan that worked?

[peteyperson]

Looking to survey (in written responses) how some of the successful savers did it.

The first obvious one is paying yourself first via automatic payroll deductions. Another might be small cutbacks in expenses and taking that small amount at the end of each month and socking that away too.

What sort of percentage of gross/net pay was being saved? I find the more useful measurement relevant for the future is one that compares yearly savings to expected future budget. This would seem to give a clearer idea how long it will take to reach 25x that budget.

How hard was it to develop the 'savings habit' and then stick to it? Did you put off saving for years thinking you couldn't save enough, but then move past that block (reasoning saving something was more important initially).

Thanks,
Petey

[Michael]

I saved about 50% of take home pay, starting the first year I worked. It just seemed natural. With my temperament, it would have been harder not to save.

[retire@40]

At least two things happen when you work long hours. *You tend to make a lot of money and you don't have time to spend it all. *At first, working harder and/or smarter will help generate the needed cash inflow for the supply side of the equation.

Over the years I have saved as much as I could without feeling deprived of non-luxury items. *I have always tried to be frugal, but not cheap. *And I created a realistic plan for how much I wanted to save. *Kinda like going on a diet, except you're dealing with money and lifestyle instead of food and calories. *To this day, I take vacations and spend within my means on other forms of entertainment, not because I have to, but because it's part of my definition of living. *I know every dollar that I spend on these things is 4 cents a year out of my safe withdrawals, but I don't think of it that way for those items.

Then the key is to tweek that budget once or twice a year and to keep track of your net worth at least monthly or quarterly. *If your net worth ain't growing, you're doing something wrong.

[JohnP]

We can't compete with Michael or Petey but we tended to save 15-25% of income for retirement and other things over the 35 work years since college. *Sometimes it was harder than others. *Used a bunch of savings to fund a business in the 70's and a McMansion. *Didn't spend extra money on cars but always had a presentable car that we drove for 10 years as in "the millionaire next door". *

Never had a master plan - only an "intention" to be able to retire at the same lifestyle as we enjoyed while working. *We saved using US Savings Bond deductions, maxed IRA's, and taxable accounts first with Smith Barney and then discovered the joys of Vanguard.

Two and 1/2 years into retirement and we live just as before except that I don't have to get on another airplane every week to go somewhere else - it was fun but I missed a lot at home - it seemed I was always behind on the home-front tasks.

JohnP

[JonnyM]

Answer, almost by accident.* Looking for and finding a job that led to a career working for an entity that "had" a great retirement plan, then about seven years ago realizing that we could choose to ER at 50ish with at least a decent lifestyle.* After that epiphany it was a matter of tweaking the savings (the pay yourself thing) such that we forced ourselves to live on a take home spendable outlay roughly in the ball-park of our potential after ER cash flow.

It worked out about twice as good as we expected, mostly do to unpredicted career advances in the last few years.

I'm firmly behind that pay yourself First concept.* If you never see it, you don't miss it.* You just adapt to your circumstances.* We didn't follow this (living within your means) AT ALL during our 20's and 30's, and we'll be erasing the last of our debt just about when I get to FIRE in a few more (wah) months, but on the plus side this only cemented the success of our future by getting us used to an expense total that will be well within our scheduled budget.

Knowing now that we'll have an extra grand or two per month for fun and reserves is just icing on the cake.

A system like Pay Yourself First is great, but, like Dave I feel that an innate desire to save is the most important thing. For me, it's not a burning desire to FIRE, but a burning desire to save. I get a real kick out of sending in an investment, and watching the balance grow. Maybe I was born with it, or maybe that cartoon with the ant and the grasshopper influenced me.

If someone is a real non-saver, a system like PYF probably won't do it. I set my sister up with automatic investments, and she cancelled it a few days later.

Someone in between saver and non-save might really benefit from a PYF or other system.

[moghopper]

70% is pretty amazing!

I "ran the numbers", but just to be clear, I'll try to define some things.

I defined "disposable income" as gross income less state, federal, local, and employee share of SS/FICA taxes. I did not include property or sales taxes.

Based on this, since I've been married, my DW and I have saved between 33% and 54% of disposable income. The aggregate total is 46% of disposable income.

I started small, and continually made myself to save more. Once it gets to a certain point, you get enjoyment just from watching it grow. It becomes kind of like a game. I've never felt deprived and have pretty well always had what I wanted. I guess simple things for simple people.

[Nords]

Quote:

Originally Posted by peteyperson Looking to survey (in written responses) how some of the successful savers did it. The first obvious one is paying yourself first via automatic payroll deductions. Another might be small cutbacks in expenses and taking that small amount at the end of each month and socking that away too. What sort of percentage of gross/net pay was being saved?

The day I finished college in 1982 I started saving $50/month. I think that was 5% of take-home but I'd have to dig deep into some storage boxes for that answer. My girlfriend pitied me and occasionally dropped by my $350/month apartment with free pizza-- so I married her. 23 years later I still get free pizza.

A few years later I think we initially set aside $400/month as a 10% savings rate (of take-home pay) and then we boosted that whenever we had cash left over. We also saved every pay raise and every bonus. One felicitious day in 1991 I took $30K advance pay for deployment, dumped it into 20th Century Ultra, and returned from the Western Pacific six months later to $50K. I had no clue.

Quote:

Originally Posted by peteyperson I find the more useful measurement relevant for the future is one that compares yearly savings to expected future budget. This would seem to give a clearer idea how long it will take to reach 25x that budget.

In hindsight I agree that's a very useful measurement, but we didn't even have the glimmerings of a discovery until after reading Dominguez' "Your Money or Your Life". We just saved and cackled with glee whenever the numbers went up. On Black Monday (Oct 1987) we dumped as much extra as we could into our Fidelity mutual funds in the assumption that "buying on the dip" was a good tactic.

In the late 80s/early 90s we assumed that we'd be spending just as much in retirement as we would when working (hey, it was a conservative assumption). Then we had a kid, which blew away all previous assumptions (about everything).

We didn't really zero in on a retirement budget until it looked like spouse was going to have to leave her full-time job before I retired. Then I crunched last year's expenses into next year's budget, made some assumptions about other capital expenses, and realized that our savings would probably last until spouse's age 60 retirement. She quit full-time work shortly after we saw that we actually could refuse that unrefuseable offer. Everything since then has been tweaking (like refinancing mortgages).

Quote:

Originally Posted by peteyperson How hard was it to develop the 'savings habit' and then stick to it? Did you put off saving for years thinking you couldn't save enough, but then move past that block (reasoning saving something was more important initially). Thanks, Petey

The hardest savings step was the first one (even with the free pizza). Life got pretty busy after that and it was easy to keep banking the excess 'cause we didn't have enough free time to waste it on frivoulous entertainment or possessions. Then we had a kid and...

Another piece of advice would be to bank all of one spouse's income and live on just one income. That way you don't end up with a mortgage that consumes 70% of your combined income-- or rather 120% of what's left after one of you gets laid off.

[Sheryl]

I just naturally LBYM.* *I have a particular lifestyle, and spending habits, and they cost about x.* *My net salary is about x+$30,000 so what doesn't automatically go into the 401(k) sits around in my bank account until I notice a balance building up, then I fund the Roth.* When that's been done I start funneling cash to wherever else I want to invest, trying to keep or tweak the asset allocation goals I've set.

If I notice my bank balance looking thin, I might reign in the spending, but it's almost intuitive, sort of like noticing the jeans are tight and not eating the second brownie.

I guess that's about as unhelpful as when I tell people I eat anything I want whenever I want, and still never gain weight.* *

No wonder everyone hates me.* I guess you can be too thin and too rich.

[MRGALT2U]

Quote:

Originally Posted by Sheryl I guess that's about as unhelpful as when I tell people I eat anything I want whenever I want, and still never gain weight.* * No wonder everyone hates me.* I guess you can be too thin and too rich.

Thin and rich works for me

JG

[Caroline]

My answer is in large part similar to Sheryl's. (If I could just do as well as her in the "second brownie" department, lfe would be grand!

Underlying LBYM, I think, is my having been born to frugal, working class people.

I have never had a really structured savings plan, apart from maxing the 401(k), adding on an IRA (when my income allows), and directing standard amounts to the Vanguard Index Fund accounts on top of that.

This is possible because I don't really WANT much that I don't have. Until recently, a 13-year-old Toyota Camry was good enough for me, clothes from the thrift store are MORE than good enough (have you seen what some people throw AWAY??), and backpacking in the U.S. and Europe has always seemed more physically and mentally enjoyable than staying in an expensive, cookie-cutter hotel which, if I closed the drapes, could be anywhere on the planet.

Ditto furniture -- I'd rather buy something old and well-made in a garage sale than something new and shoddy from the mall, and my house is relatively small. Never saw the point in buying a McMansion I'd have to spend a lot of time cleaning.

Guess I'd sum up by saying that not having expensive tastes means not having to work to save.

FWIW,
Caroline

[vic]

I don't really know what % I save from my paycheck, I definitely have no plan at all except for putting away whatever is left over. I think it is quite a bit because I pay all my living expenses with my debit card and it seems to be $1000-$1500/month plus the property tax at the end of the year. I max out my 401K. Until the house was paid off, I let my account grow a few thousand $$ extra and then sent it to the mortgage company. Then I started plunking it into private real estate partnership ventures and now it is going into building our new house. Thrift store clothes are also good enough for me, the older car too. The good thing about thrift store stuff is that it is cheap to buy and I don't mind throwing it out either. I still have lots of stuff that was very expensive to buy and now I don't want to throw it out because in my mind it is still a $200 item.

However, I could never cut back on quality groceries (I have no problem with $10/lb cheese), eating out, vacations or getting rid off the maid (even though my employer is getting rid off me soon). We may choose a more affordable vacation destination but that is about as far as I would want to go.

Vicky

[Ginger]

My saving habit/budget system started early in childhood. We had a lovey neighbor friend who never married and worked full time, and I was usually at her home when she would budget her money on pay day. She would put cash in different envelopes! To this day, I still use a budget system on pay day. My husband thinks it is a waste of time, but it is a system that works for me. (Not cash in envelopes, but all money is accounted for on a spreadsheet each payday.)

[BigMoneyJim]

At age 21 my boss had me watch a company training video for the 401(k) plan. (Um, *I* was 21, not my boss...too tired to figure out the gooder grammar.) What got my attention and remains in my memory is a graph of two savers who saved the same amount, but one started at age 25 and stopped at age 35 while the other started at age 35 and saved through retirement. At retirement age (60 or 65, I forget which now) the saver who started earlier had 2-3 times as much as the saver who started later but never stopped saving. I was not a forward-thinker by any means, but I was practical and saved the max (15%) and told myself I'd thank myself later. I sure have.

So the key was payroll deduction and having the money not readily available. I've been tempted to raid the 401(k) piggy bank a few times, but the 10% penalty plus income tax really hurts, so I've always found alternatives.

For after-tax accounts I didn't start getting my act together until age 29-30 about 5 years ago. My career was progressing, and I kept getting raises but had less and less money to spend. One month I flat ran out of money before the end of the month and told myself something's wrong because I'm making twice what I did when I had more money than I could casually spend.

Aside from a few months of soul searching and no income I've been steadily improving my after-tax situation and became debt-free around December 2004.

I'm still feeling for my balance between saving and spending for now. The last 3 years of debt reduction was determined and while not overly frugal it was certainly constrained from my past, and I'm having trouble adjusting to a happy medium between overly constrained and spending thoughtlessly. (My "spending thoughtlessly" hasn't endangered my debt-free status or my growing savings.)

My next big financial challenges I think will be my next car purchase and--if I should decide to do so--my first home purchase. There may also be some fun if I quit and move without having another job lined up, which for various stupid reasons I may very well do this year.

[Helen]

Hi Petey !

Well, I'm going to parrot most of the people whom have already posted.

Except I got a late start. I have been working full time in the IT field since I was 25. I started out during the recession of 1982 in Boston at $14,000 per year. I pretty much pissed away my salary for the next ten years.

Then I fell in love and two years later moved to Oregon. We rented for a year then bought a house based on my salary only. Around this time I started to save for retirement.

We maxed our 401ks, Roths and set up an auto deduction plan to an after tax account. As our salaries increased we increased our savings.

We just paid our mortage off this year - it took us 12 years.

I also set up a spread sheet for incrementing our savings. If we increase our savings by $3k per year, we will hit our magic number in 7.5 years which coincides with the age we can retire with reduced pensions and full medical coverage.

So I think for us:

1. having a goal (retirement)

2. buying an inexpensive house

3. paying ourselves first and living on what is left

4. not having a lot of material desires

5. not paying a lot in interest

6. having a high household income

7. working for federal and state governments which provide pretty stable (but small) pensions and good health coverage

8. not having kids

Items 2 - 5 could be summed up with having an aversion to debt and a propensity to save. As for number 8 , we could probably have a child now without impacting our retirement date.

All factors have contributed. I really wish I had done this earlier, but then again I had fun pissing it away in my 20's. Also, without the health benefits we may not have been able to retire sooner anyway.

When I look at that list and compare myself to the average American, I wonder how most people will be able to retire.

-helen

[chris2008]

After German equivalent of high school I worked in a bank, lived at home and saved 30% -50% of salary for university. There I also had some interesting insight into other people's financial habits. When I started university I moved out but the banking experience provided several good jobs during weekends and holidays, so I decided not to touch the savings as long as possible.
In the middle of university I married. DH was quite surprised to learn about my nest egg - just as much as I was when he told about his...
We both enjoy a reasonably frugal but not self-denying lifestyle, like to travel.
So we set aside a monthly savings amount of app. 15% of our combined income.
We decided to track all expenses, just for curiosity. We found that already this implementation of tracking reduced our expenses by 10% and we missed nothing!
We purchased a house after 2 years when we calculated that we could still finance it on his income alone.
After university I got great jobs that gave us the opportunity to early repay the house mortgage and continue saving while increasing the lifestyle a bit. (Kids were in the plan but that did not happen.)
Now, at age 46/53 the plan is to retire within the next 5 years.

My conclusion:
- Establish a habit of saving regularly,
- Look into your expenses,
- Find a partner with similar attitude,
- Enjoy life, it may be short !!! (After all, there is no tombstone "Thanks for your savings account"

[preben]

As an expat with housing and car paid, it was not that hard to save up to 80% of the salary. When on business trips one saved even more.
The money went straight into a globally and asset class wise diversified, low cost portfolio.
Cheers!

Good point, davew. One way they can really get to your nest egg is through the so-called "fair tax." Some of us were taxed when we earned the money, taxed on the interest over the years, and now will be taxed again when we spend it.

[Andre1969]

At this point, I'm probably putting away around 60% of my gross pay. My base is $50K per year, before OT, and I'm having 25% taken out, plus the company matches 3%, basically that's like 28% of my pay, or $14K getting socked away right there.

I'm thinking about boosting that a bit though, since you can actually put in $14K of your own money in 2005, plus the company match. But I'm going through a bit of a rough patch right now (bulding a 4-car garage that's starting to run over budget, and a few other odds and ends) so I might hold off on upping my percentage until I get past that.

I'm also putting $1300 a month into mutual funds with Janus and American Century. It had been tempting over the past few years as prices crashed to pull out of these funds, but perseverance paid off and most of them are profitable again. Main problem here is that I didn't really start ramping up my investing until 1999, right before things started crashing. So a lot of my funds were purchased at high prices.

So basically, after taxes, investing, etc, I really don't have a whole lot of paycheck left over. My net comes out to about $544 per week if I don't work overtime, and then that 1300 per month comes out of that.

But on the plus side, my HELOC is only $600 per month (interest is right now around $538, but I've been paying a bit extra). The vehicles are all paid for. I also have two roommates, which brings in some nice extra income, and they actually buy most of the food.

DaveW -- I agree -- probably we'll see some combination of the things you have listed, as well as new things I haven't thought of. Seems inevitable to me