Financial Plan Starts With Paying Yourself

“Save money” is probably the most basic financial advice, but it’s advice that many people have a hard time taking. With so many demands on our income, it’s easy to take the attitude that we’ll start saving next week - or next year.

That’s why so many financial advisers have this suggestion: Pay yourself first. In other words, make saving your top priority.

Almost all savings fall into four categories, starting with emergency savings to handle the situations that arise when you least expect them.

A good rule of thumb is to keep up to six months of take-home pay in an emergency fund. That would get you through hardships such as being temporarily out of work or disabled before disability insurance kicks in.

The second most common form of savings is a goal-oriented fund. Whether it’s a down payment on a home, a new car, next summer’s vacation or a root canal job, few of us can just write a check out of the current month’s income.

Many people try to save for a college education for themselves or their children. College savings funds are often started many years before the first tuition bills will come due.

Equally long-term in nature is retirement savings.

Money set aside for college and retirement is often treated as investment rather than savings.

When the priority is to protect your principal from any drop in its value, you should be a saver.

When the priority is to achieve growth or income while allowing for some fluctuation of the value of your capital, you should be an investor.