Pay Yourself First

Today we face many challenges when it comes to deciding not only if you can retire, but when can you retire. As I have mentioned in previous blogs, this is especially true for Special Category Employees (SCEs) working for the federal government. In their case, retirement is decided for you. SCEs have a hard deadline that they are working up against, age 57, mandatory retirement. Will you be ready?

This "catch-22" means that not only do you have less time to save for retirement, but you have a longer retirement time horizon that your money must last. In addition, all the other challenges you face such as the uncertainty of social security, rising healthcare costs and inflation. Although we do not have any control over any of those aspects, there are plenty of steps that you can control to help set your mind at ease when it comes to retirement planning.

1. Start early. I cannot stress enough how important TIME is your friend. The three pillars of investing are Contribution Rate, Returns (ROI) and TIME. Time is the only thing that will not fail you when it comes to investing. The more time you allow your money to compound, the higher the likelihood that you will reach your retirement goal. Time is the one factor that can help make up any missteps in your retirement planning or downturns in the markets because markets are cyclical. Since time is your friend, but time is limited, it is most important to get your "Army of Dollar Bills" working for you as early as possible. Since you don't have as many years to contribute as traditional employees, it is imperative to contribute aggressively.

2. Set goals. You cannot get anywhere in life if you do not know where it is you want to go. Begin with the end in mind. Only after knowing where it is in life you want to go or once you've set a goal, can you lay the road map on how to get there. The hardest mindset to overcome for younger people is procrastination. Thinking you have plenty of time to do it later. This is missed opportunity cost or the amount of money you missed out on making when it wasn't invested in the markets.

3. Pay yourself first. When most people create a budget, they most often subtract all of their expenses from their income and then decide what to do with the money left over. From that money, they decide how much or if they will invest. I believe this is a mismanagement of priorities. If you've set a goal and created the road map on how to get there, make it a priority to pay yourself first! Then deduct all of your other expenses and see where you come out. If you still have money left over, then enjoy it and/or look for other ways to accelerate your financial goals. If you come up a little short, then it may be time to reduce expenses. But if you make your contribution amount as your first line item of the expenses, I promise, your future self with thank you!

   
   

Steps to help you achieve your retirement goals:

1. Automate your investing. The best way to pay yourself first is to automate it. Having a predetermined amount of money deducted directly from your pay and deposited into your TSP and/or other investment accounts in the form of contributions will alleviate any hesitation and more often save you from yourself. This becomes an automated habit initiated by the logical you, making your retirement a priority versus the emotional you who, just wants to spend the money on that new shiny gadget.

   SIDENOTE: Delayed gratification is not always easy. Trust me, I'm speaking from experience here. It is never fun to feel like you're living from paycheck to paycheck. There were many times throughout my career when I felt like this. What I came to realize is that is just society telling you how you should be living or keeping up with the Jones'. If you've made investing in your retirement a priority and that is your first line item deducted from your pay, then it is okay for your checking account to be on life support at the end of the pay cycle...providing all your necessities are covered and you do have an emergency fund.

2. Side hustle and/or passive income. If you've made investing a priority by paying yourself first and are coming up a little short each month for you your living expenses or you want to accelerate the process, consider some alternative money-making ideas. For me early in my career when my wife was still working and we had disposable income, it was investing in real estate creating passive income. Later in my career when my wife was a stay-at-home mom and we were a single income family, I took a second job with Uber to pay for vacations. I've even "flipped" a few cars for a profit. It could be as simple as mowing yards for extra cash. Be humble. Don't let your position fool you into thinking that anything is beneath you. If it puts food on the table or accelerates your retirement, as Dave Ramsey likes to say, "Live like no one else so that someday, you can live like no one else!"

3. Emergency fund. Pretty self-explanatory. Obviously, the best method for having an emergency fund is cash. However, I am not opposed to an emergency fund being a credit card or HELOC. Those options do come at a cost when used and require a plan on how you're going to deal with them if used. The important thing is you have a plan for emergencies. One of the best ways to build up an emergency fund fast is to use any windfalls of cash such as tax refunds, spouse's pay or a bonus, etc.

4. Avoid withdraws. Taking out a TSP loan has the penalty of missed opportunity cost attached to it. I'd be a hypocrite if I said to never do it, as I have taken TSP loans over my career. However, I always had a plan to pay them back quickly and they were not for large amounts. That being said, please consider all other options, credit cards, HELOC, personal loans, etc. before pulling the trigger on a TSP loan.

5. Take advantage of employer benefits. This includes any matching funds your or your spouse's employer matches in retirement accounts (TSP, 401K). I've said this thousands of times, the minimum you should ever be contributing to your TSP is 5%. Even if you get into a bind and have to temporarily lower your contributions. DO NOT forgo contributing at least 5%. That is the easiest way to get a 100% ROI on your money as the government matches your contributions dollar for dollar!

6. Maximize tax advantaged investment accounts first. This being your Traditional TSP or a spouse's 401K. If your spouse's employer has a matching 401K, but you're not contributing into it because you're maxing out your TSP and can't afford to, then lower your contributions to contribute to her 401K up to the matching amount. TSP returns are good, but not as good as a 100% ROI. Especially if you are in the 22-24% or higher tax brackets. These contributions come out of your pay pre-tax, which also lowers your taxable income, thus lowering your taxes so that you keep more of the money that you worked for in your pocket. If you were in the 12% tax bracket, then that would possibly change the scenario, and we could talk about Roth accounts, but I'll leave that discussion for another time. Also, IRAs have smaller contribution limits and for some, when you get into higher income levels, become phased out as an option.

7. Review and adjust. I suggest reviewing your retirement goals and progress annually. This allows you to stay focused on reaching your goals and not get too far off track if something doesn't go according to plan. Also, it allows you to project if you will reach your goal at your current contribution level or if you need to use money from a promotion, step increase and/or your annual COLA to increase contributions. This is most important in the last five years leading up to retirement, it is your last shot of reaching your retirement goal. For me, this was a very exciting time. This is when I was confident my goal would be reached, it was in sight and the feeling of relief runs over you. Not only did I know I would be okay in retirement, but the feeling of pride washed over me for what I had accomplished. It is also during this time that the excitement of starting to plan for the transition into retirement begins, planning for if and/or when you will start making withdraws from your TSP, how much will you withdraw based on your retirement needs and most importantly, how will you make that money continue to grow and last throughout your retirement or creating generational wealth!!

8. Become financially literate. Read books and articles, watch YouTube videos, listen to podcasts or whatever way you best absorb information. Not understanding how money works, or the language of money is the quickest way to being poor. Being broke and being poor, are two very different things. Being broke is temporary. Being poor is not a station in life, it is a mindset. If you don't know the difference between an asset and a liability, I highly suggest you read the book by Robert Kiyosaki, Rich Dad, Poor Dad. It is a quick read and fairly simplistic in this concept, but a must read to learn the difference.

Jerome R. Moyer

T$P Money Tree