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Published December 01, 2011, 11:30 PM

Money-Savin’ Momma: Pay yourself first

If you don’t tell your dollars where to go, they’ll disappear.

By: Sherri Richards, INFORUM

If you don’t tell your dollars where to go, they’ll disappear.

My husband and I found this to be true long before I read it in a Dave Ramsey book. It’s the reason that when you plan to save whatever’s left at the end of the month, there’s never anything left.

For years now, we’ve “paid ourselves first,” and amazingly, there always seems to be enough to go around.

Today’s online banking features make it easier than ever. Every month, automatic transfers send money into our individual retirement accounts, money market and future car fund, before we even miss it.

But where should you tell those dollars to go first? Sometimes all of the things you need to save for seems like a never-ending list: retirement, college for the kids, an emergency fund, that trip to Italy or the down payment for a house.

It’s a matter of prioritizing your savings goals.

Last October, I wrote an article for The Forum about Ramsey’s Financial Peace University course, which was being offered at churches in the community. It was the first time I’d heard about his Seven Baby Steps, which lay out his top priorities for your finances.

I realized we were following them closely, but not exactly. We’d saved up an emergency fund (steps 1 and 3), were contributing 15 percent to our retirement (step 4), putting some in Eve’s college savings account (step 5) and making additional principal payments on our home (step 6).

But out of line with the steps was Craig’s lingering student loan payment. Ramsey would want us to get rid of that in step 2, before putting money toward retirement, college savings or paying off the house. My accountant husband, thinking in terms of interest rates and tax deductions, didn’t agree.

The student loan has since been paid off, and we’re still chipping away at our savings goals, even with a new baby and me working fewer hours.

So how should you save your dollars? Different financial writers offer different advice, but all have common themes.

First and foremost, they say you should have an emergency fund that could cover several months’ expenses. Some say three months; some say 12. Keep this money safe. We stash ours in a money market account at the same bank as our checking account.

It’s often advised to pay off your high-interest debt by “snowballing” your payments – putting the same amount toward the debt each month even as your balances decrease.

Then, put that money toward your retirement – ideally 10 or 15 percent of your income or more – before your kids’ college savings. Worst-case scenario, they can take out student loans. There are no loans for retirement.

Challenge yourself to max out a Roth IRA, contributing $5,000, next year. If that sounds impossible, consider this: Trimming $96 a week in wasteful spending – perhaps on eating out or fancy coffee or your own personal vice – and putting it into an IRA could earn you $49,678.65 in interest over 30 years, assuming an 8 percent return on your investment.

Not retiring for 40 years? That $5,000 will grow to $121,366.93.

Paying yourself first can really pay off.

Calculations performed at www.powerpay.org.

Sherri Richards is a thrifty mom of two. She blogs at Tags: