So it is with the myth of paying yourself first.
It’s usually pitched as putting aside the first 10% to 15% of your paycheck into your 401k with any excess (when your 401K’s maxed out) I guess being put to work elsewhere. Some offer slight variations on the theme, like David Bach’s one hour of salary a day (or 12.5% of your gross).
Any way the ‘gurus’ put it, the alluring promise is of following this discipline your whole working life to ‘finish rich’. David Bach – author of the book to the left – goes even further calling this a powerful one-step plan to live and finish rich.
We have to examine this promise very carefully, because following this line of reasoning for 40 years to see what happens leaves very little room to maneuver if you come up short.
If the ‘normal’ working life is 40 years – to me this concept is almost incomprehensible – then, picking a mid-point in your career and a mid-salary of $50,000, adjusted for inflation, that you think (another terrible assumption) that you will be happy with for the rest of your life, then in my last post I showed that you would need to save almost half of your pay packet (again, indexed for inflation) until you retire …
… simply to replace your $50k salary (by then, inflated to roughly $100k but so have all of your living expenses).
But, what if you start young – as Bret @ Hope To Prosper suggests – and are happy to work 40 years?
Firstly, I would have to ask why you’re reading a blog titled “How To Make $7 Million In 7 Years” 😉
Putting that aside, you would need to save a tad under a quarter of your paycheck if you want to maintain your $50k per annum lifestyle beyond retirement (inflation would have roughly halved your buying power twice in that period, meaning that you would actually be withdrawing around $200k per annum just to maintain the same lifestyle that $50k buys you today).
Unfortunately, you are unlikely to reach your desired salary so early in your 40 year working career …
So, if you’re a graduate with a starting salary of, say, $30,000 and you somehow ramp that up to $50,000 after 5 years (at which point you start saving for retirement), you would need to save around one third of your paycheck for the remaining 35 years until you retire.
To be clear, following the common wisdom and “paying yourself first” 10% of your $50,000 gross paycheck (then indexed for the next 40 years for inflation) as recommended by many (if not most) personal finance ‘gurus’ is a sure-fire way to make sure that you retire on over $60,000 a year.
However, far from being a pay increase, because of inflation it actually represents less than 50% of your current $50k salary. Work and save diligently for 40 years and cut your paycheck in half …. nice 🙁
Any way you look at it, paying yourself first is no Powerful One-Step Plan to Live and Finish Rich as claimed by David Bach and his ilk.
Next time, I’ll share a plan that will work much better …