The Road to Financial Freedom

This is the first in a series of lenses - be sure to check back soon...

All financial planners, counselors, and educators agree on this principle of paying yourself first.  Motivational and success experts also recognize and value this concept.  David Bach, author of the Finish Rich Series, John Commuta author of Transforming Debt into Wealth (although John varies slightly, and says be debt free first), Jim Rohn one of the nations most prestigious and accomplished financial educators and philosophers, and my personal mentor Jack Canfield co-author of the Chicken Soup for the Soul series, and Success Principles, to mention just a few.

Take a minute and think about the sheer contradiction between what we think we are working for, and the actual road we are heading down. We all work to provide ourselves with security, both now, and especially in the future when we want to sit back and enjoy the fruits of our labor. After all, that is our goal to eventually "retire" and live comfortably off of the income of our life long investments, in order that we can enjoy our golden years correct? So, we agree then, that our primary purpose for working is to provide for ourselves and family? Then why is it that we put all of our other financial commitments ahead of ours? We pay everyone else first, and only then, do we even think about funding our security that we "said" we are working for. This is completely backwards. Paychecks are about the ONLY thing in life that comes without detailed instructions. You can't even buy a toaster without accompanying instructions, yet we're left to figure this all important asset all on our own.

Out of each and every paycheck that you earn, the portion which is meant to fund your security objectives has to come out first. Even before the government gets their hands in your pocket! That's right, you literally move yourself to the absolute front of the line. You might ask me, how can I pay myself, before I do my commitments to the government? It's easy, the government has made provisions for you to do just that. It's called "pretax" investments. In my humble opinion, this is the most profound and powerful method of achieving financial security in existence, yet it is the most under utilized in this country.  Our tax laws are structured in such a way, that you are afforded the opportunity to bypass taxes, initially, when saving for retirement. This is so critical for two reasons. One, because this bypassing income taxes allows your money to grow much faster now when you need the growth. Two, because it allows you to save a percentage of your income, with the benefit of, not taking a pay cut equal to the percentage your saving.

Yes, it IS possible to save $5000 annually without taking a $5000 cut in your pay. This is where thinking about, and planning, the funding of your retirement becomes absolutely fun! Let's assume for ease of arithmetic that you earn $50,000 a year income, and you are going to start putting 10% into a pretax retirement account. That means that you'd be setting aside $5000 annually to fund your retirement. I can hear the moans now, "I can't afford a $5000 a year pay cut!" Not to worry, remember I stated previously that, with pretax investing your net pay decrease will be less than your contribution.  I'm going to show you how this is possible. In our example you're earning $50,000 a year right? Well, that is incorrect, assuming a tax rate of 35% (this is roughly the average for most Americans), what you'll end up bringing home is $32,500 net income. ($50,000 - 35% or $17,500 = $32,500) Are you with me so far? Now out of this $32,500 spendable income you bring home, a 10% pretax investment is not going to reduce it to $27,500 ($32,500 - 10% or $3250 = $27,500). Why? Because as I stated earlier, you're paying yourself first - before you pay the government. In other words the $5000 comes right off the top. You're reducing your gross income, which takes it from the original $50,000 down to $45,000. Now this new gross income is subject to the same 35% tax, which equals $15,750. Now you're bringing home $29,250. ($45,000 - 35% or $15,750 = $29,250) Do you see now? The net reduction in income is actually only $3,250 a year! $32,500 (original take home) - $29,250 (new take home) equals $3,250 (net income reduction). Thus your $5000 annual retirement investment is only "costing" you $3,250.
Let's take it a step further, spread that $3,250 reduction over twelve months, that's $271 a month. That's works out to only $9 a day!! Can you really tell me that you can't afford $9 a day to fund your American Dream?

Again, this IS a fundamental shift in thinking, but I promise you, with time and discipline, it will have such a dramatic impact on your financial life that you will be simply amazed. I strongly urge you to begin putting this practice in place immediately. If you feel it is impossible to do 10%, start out with something smaller, 5 or even 1% , just have a goal of increasing the percentage on a consistent basis.

You will soon realize you're  not even missing this money and you'll want to increase your contribution!