One of the best, early lessons I learned was to “Pay Yourself” before you did anything else with your income. My wife and I spent 6 ½ frustrating* years doing things the wrong way before wising up a little bit and actually putting money towards our future.
*Let me be honest: in the middle of those 6 ½ years, we had a great time. We went out to eat several times a week. Went out for drinks most nights during the summer. I can not deny the fun we had spending our money with reckless abandon (especially after we bought our 1st house).
That being said, we really don’t have much to show for those years of spending., and that’s frustrating. What I wish we had been doing all along was saving first and spending what was leftover. It took a long time to learn that if we just put money away first, we can spend what is left over without the guilt.
We Finally Learned
The most impactful change that put us on this $1,000,000 path was paying ourselves first. The first 1-2 years that we were married we were stashing 40% of our take home pay into a savings account to get ready to buy our first home. Unfortunately we were not putting anything towards our retirement (with the exception of a pity deposit in 2011 in my Roth IRA).
Just 18 months after getting married, we bought our first house. We had accumulated $20,000 in our savings account (earning 0.05%) and used a little more than half of it to pay our closings costs (we did not put any money down for the FHA loan). We used about half of the leftover money in our savings to furnish a couple of rooms in our new house and basically saved nothing over the next year. The only good thing we were doing was over paying our mortgage in order to get the PMI eliminated right at the 5 year mark.
Our savings didn’t grow in 2012, despite the fact that I received a promotion that came with a substantial raise (~36%) just 4 months after moving in to our new house. Not only did my salary increase, I also received a company car, gas card and cell phone. The opportunity to supercharge our retirement savings was right there for the taking. We could have kept our lifestyle exactly the same and stocked away thousands every month. Unfortunately, we did not put away the extra thousands of dollars that I was suddenly making each year. We don’t know where that money went, but we do know what caused it to the flitted away.
We let lifestyle creep happen. Almost every night was spent eating out at a restaurant. We spent our money without paying any attention to how much we were spending. It’s a miracle that we didn’t rack up credit card debt. Eventually we started “saving” again.. and again it was a goal for us to reach and spend immediately. We wanted to take a once in a lifetime vacation that would be our “Babymoon”. We basically made the decision after I received another promotion and substantial (~31%) raise.
So we started saving over the next year. All the while we were not really following a budget other than diverting some of my new income to our heavily underutilized Ally Savings account, we saved $16,000 and spent all of it (and then some) on our vacation the summer of 2015. We ended that year with $2,400 cash and a credit card that would take several months to be paid. Fortunately I began to see the light on how quickly we could accumulate money by diverting my income into our savings account first, and only spending what was left over.
Pay Yourself Automatically
We kept a small deposit going in to our savings account while we paid off the credit card. After we paid off the credit card, we started funneling more money to the 401k and our savings. In 2015 the 401k was $42,147.24. At the end of 2016 the 401k was $59,992.15. But, by the end of 2017 the 401k had grown to $91,335.49. You can see by that increase that we became more serious in 2017. By the end of 2017 we were automatically depositing $285/wk into our Ally Savings account and had made that our primary savings account. The money comes straight out of my paycheck and never hits our checking account. Since we never see the money, we never miss it. With each raise I (hopefully) get in the future, we will automatically divert extra into our savings. No opportunity for lifestyle creep to enter the picture.
We keep getting better. We use the Ally account now to pay for our kitchen remodel Home Equity Loan. The savings account is replenished each week with $350 injections. That’s $18,200 going in each year and only $14,100 coming out. We are running a nice surplus in that account now. It’s encouraging how much we’ve been able to change in a couple of years. More encouraging is how much our retirement accounts have grown in that time. We’ve come a long way, but we’re just getting started on our journey. We have 4,325 days to hit our Million Dollar goal, and we can’t stop now.