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Subject:  The Power of Paying Yourself First Date:  2/8/2004  1:45 PM
Author:  babyfrog Number:  39026 of 76418

Between my wife and myself, we expect to see more more money put away in our combined retirement plans this year than I earned in my first year working full time, back from mid-1997 to mid-1998. This includes all expected net contributions on our behalfs to our retirement accounts, such as IRA contributions, 401(k) contributions, employer ESOP/Profit Sharing contributions, and net additional preferred dividend contributions (a unique feature of our employer's retirement plan). Our combined vested retirement account balances as of right now exceeds one year of our combined salaries, and it works out to about 3.5 years of our living expenses. Seeing how far we've come financially in such a short period of time is really remarkable, and it is a testament to the power of Paying Yourself First.

I know what we earn, and while we make a decent living, neither one of us is considered a highly compensated employee, and neither one of us has ever maxed out social security taxes. All of the progress we've made has come from making the decision to pay ourselves first. As soon as I started working, I bought company stock through its SIP (shareholder investment plan, the company's DRiP), not for the appreciation, but to keep the money out of sight and automatically invested, so that when I became elegible for the 401(k), I could shift the cash to that investment vehicle, instead. Once I became elegible for the 401(k), I shifted my contributions to the 401(k), and got to feel the extra bang-for-your-buck that comes from making pre-tax contributions. My wife, on the other hand, before we were married, had originally adopted a lifestyle that was closer to her means and could not initially afford to contribute. In her case, her raises went to the 401(k), until she reached the point where she was able to max it out.

In both cases, it was a relatively painless process, as we were able to put away money that we never saw, never spent, and never became dependent upon. We still have a good life. We vacation, visit family, subscribe to the theater and orchestra, eat the occasional meal out (though we both like our home cooking better), play sports, visit with our friends, live in a way-too-nice house, drive reliable cars, throw the occasional party, and otherwise do what people do to keep themselves entertained.

We're each 28 years old, and the earliest we can touch any of this money without an SEPP schedule or hardship withdrawl is 27 years from now, when we reach the age 55 qualified withdrawl with separation of service age for our employer's plan. Figuring on a 10% estimated tax deferred compound return rate over that period of time, the money we put away this year alone could potentially be worth about 12-13 times what is being put away, this year. That's better than 12-13 times my first year's salary. And that's on this year's contributions alone; the existing balances should compound right along with that new money. Even factoring inflation into the picture, things should turn out fine.

On the credit card board, they use the concept of the snowball to talk about paying down debt. Every month, a little bit more gets put towards the debt, until, like a snowball rolling down the hill, the repayment plan picks up a momentum of its own and the debt gets paid in full. That snowball concept works just as well on the retirement investing side of the ledger. The little bit we add each month keeps attaching to the amount we had already added to the snowbaall. The act of rolling along keeps the snowball growing as well, and someday, it will pick up enough momentum to roll and grow on its own. Eventually, instead of us adding to it, we can start living off it, secure in the knowledge that its continued growth will likely allow it to outlast us.

The most amazing thing, as I sit here and run spreadsheet projections into the hypothetical future, is the fact that all the money we've put away and invested is money we no longer have to work for. Other people do all the work, and we stand to benefit from the dividends and capital appreciation that should result from their labor. Of course, they benefit from our capital, which allows them to operate, expand, thrive, and generate those returns. And of course, they benefit as well, from the salaries they earn for providing that labor. It is nice to know, however, that there are so many people out there who are willing and in many cases eager, to do the work that should eventually allow us to retire in comfort.

Our income may forever be solidly entrenched in the American Middle Class, and we will likely never be Rockafellers, Gates, Vanderbilts, or Buffetts. In time, however, thanks to paying ourselves first, we ought to be able to benefit from the same capitalist system that benefits them. It's a beautiful thing.

-Chuck
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