Paying yourself first key to consistent investing
BY CHET OSTERHOUDT
Monday, October 8, 2018
Consistency is a key ingredient of success in many activities — including investing.
And one technique that can help you become a more consistent investor is paying yourself first.
Many people mistakenly wait until they've got some extra cash before they start investing — but as you know, it's pretty easy to spend whatever amount you're holding.
How can you avoid falling into this habit of intermittent investing? By paying yourself first. Each month, have your bank move money from your checking or savings account into the investments of your choice. By taking this hassle-free approach, rather than counting on your ability to send a check, you can help ensure you actually do contribute to your investments, month after month.
By moving the money automatically, you probably won’t miss it, and like most people who follow this technique, you will find ways to economize, as needed, to make up for whatever you’re investing.
You already may be doing something quite similar if you have a 401(k) or other retirement plan at work. You choose a percentage of your earnings to go into your plan, and the money is taken out of your paycheck. And if you’re fortunate, your employer will match some of your contributions, too.
But even if you do have a 401(k), you’re probably also eligible to contribute to an IRA — which is a great vehicle for your pay-yourself-first strategy. You can put in up to $5,500 per year to a traditional or Roth IRA — or $6,500 if you’re 50 or older — so if you are able to “max out” for the year, you could simply divide $5,500 or $6,500 by 12 and have either $458 or $541 moved from your savings or checking account each month into your IRA.
Of course, you don’t have to put in the full $5,500 or $6,500 each year, although some IRAs do require minimum amounts to at least open the account.
You might think such modest amounts won’t add up to a lot, but after a few years, you could be surprised at how much you’ve accumulated. Plus, you may not always be limited to contributing relatively small sums, because as your career advances, your earnings may increase significantly, allowing you to boost your IRA contributions continually.
In any case, here’s the key point: When you invest, it’s all right to start small — as long as you keep at it. And the best way to ensure you continue investing regularly is to pay yourself first. If you do it long enough, it will become routine — and it will be one habit you won’t want to break.
This article was written by Edward Jones for use by Chet Osterhoudt, a financial adviser for Edward Jones in Nashville.