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Dollars & Sense: “Start The New Year By Paying Yourself First”

With 80% of Americans giving up their well-intended New Year’s Resolutions in just three months, you might start to think, why even bother? According to statisticbrain.com, the top 3 resolutions for 2015 were to lose weight, get organized, and to spend less money and save more. Maybe we give up on some of the more popular resolutions because they can’t actually be achieved in just one year. Things we want to achieve often require a change in lifestyle. That takes time, and in some instances, trial and error.

When you set financial goals, they require a long term commitment over years, and it can take decades to realize results depending if they are short or long term savings goals. Saving for your future has to start sometime, why not now? Your commitment and necessity will only get stronger year after year. Because saving, investing, and growing a portfolio takes time, there should not be any pressure for immediate results. Your best results are measured over a period of years, not months.

Before you begin saving for either short term or long term goals, you have to understand and subscribe to the old adage of “Pay Yourself First.” You are just as important as paying VISA or MC. This means setting aside a percentage of your pay, month after month, before you pay your bills. As simple as this concept sounds, it is difficult for many to grasp.

When you pay yourself first, you’re mentally establishing saving as a priority. You’re telling yourself that you are more important than the cable company or the landlord. Building savings is a powerful motivator — it’s empowering.

Paying yourself first encourages sound financial habits. Most people spend their money in the following order: bills, fun, saving. Unsurprisingly, there’s usually little left over to put in the bank. But if you bump saving to the front — saving, bills, fun — you’re able to set the money aside before you rationalize reasons to spend it.

Short term goals would generally mean less than 5 years. These might include putting aside extra money to pay off student loans, saving for a wedding, honeymoon or vacation, even saving for first, last and security in order to get yourself an apartment rental. Since these are all shorter term goals, it would not make sense to save in any investment vehicle that involves risk. Risk, meaning you could get back more or less than your initial investment and has no guarantee of principal or interest. Check out online savings accounts; they are FDIC insured, have no minimums, and some are offering .90% interest.

Mid-term savings goals would be in the 5 to 10 year range. For a younger person, a mid-term goal might be to save for a substantial down payment for a home purchase. For families with younger children, it would be setting up a college savings plan such as a 529. Even pre-retirees have mid-term goals, especially if they are planning for an early retirement. Investing for a 5 to 10 year window still merits caution and can involve a combination of guaranteed bank savings in addition to other investments where there is no guarantee of principal or interest but have the potential for capital appreciation. The combination would be best determined by your overall risk tolerance.

Long term goals are savings for your future and the ultimate goal of retirement. Retirement is one of the best reasons to pay yourself first, especially if you start at an early age. Let’s assume you want to have $1 million dollars at age 65 and hypothetically had a 5% annual rate of return. If you started paying yourself first at age 35, you would have to save $672 a month. If you waited until age 40 to begin saving and still had that same goal, instead of only saving $672 a month, you would have to save $1,700 a month. In this example, putting off saving for yourself had a hefty price tag of over $187k.

Setting your goal and the percentage of your pay that you will save is the easy part. Deciding which investment vehicle you should use is more complicated. The advice of a financial advisor will help you determine the best way to save for all of your goals. Investing has changed; it’s more complicated and a financial advisor will explore the best options based on your tax situation, your goals, and most especially, your risk tolerance.

Whether you have long term or short term savings goals, remember to stay the course and always remember to pay yourself first.

Roberta L. Nestor is a financial advisor practicing at 491 New Haven Avenue in Milford, CT offering retirement, long term care, investment and tax planning services. She also offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser. Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth. Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. Roberta can be reached at Nestor Financial Network, 203-876-8066 or roberta@nestorfinancial.com.

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