Household CEOs—Pay Yourself Regularly!

The Chief Financial Officer (CFO) of an organization is a corporate officer primarily responsible for managing the financial risks of a corporation. This officer’s duties also include financial planning and record-keeping, as well as financial reporting to higher management. Often times, the CFO is also responsible for the analysis of financial data. In other words, the CFO must educate and supply the Chief Executive Officer (CEO) of the necessary information to make sound financial decisions.
All of us run a business in our daily lives: our households. And Jill reminds me, almost daily, that she is the CEO of our home . . . not me. Each and every one of you, Cutter Family Finance readers, is also CEO of a very important business . . . your household. You are in charge of managing the overall operations of your home.
When Susan and I meet with prospective clients, we explain our role to our clients. We are their CFOs. We are the folks who teach, analyze and provide information, so our CEOs can make sound financial decisions.
As CFO, there is one piece of advice that we almost always give our clients, especially in the current retirement landscape facing most investors. That advice? Be sure to pay yourself.
As CEO, it’s easy to look at all of the things within your household that need your time, energy and, yes, money, but you must not forget about yourself, and the need to invest in your own future. This is a lesson many Americans are learning the hard way.
According to a 2016 report by the Economic Policy Institute, almost half of all American households have no retirement account savings. The average retirement savings amongst American households is just $95,000, and that number is skewed based on the large savings held by the top few families. The median, or those at the 50th percentile, is just $5,000. You and I both know that $5,000 of savings is not even enough for an emergency fund, much less a future retirement. The problem? We, as the CEO of our own households, rarely make ourselves a priority. Paying ourselves, in the form of retirement contributions, is oftentimes put on the back burner, behind a family vacation, or a car for the new student driver, or a larger house. We always think that once we get past the next financial hurdle, then we will start saving for retirement.
But guess what comes after that financial hurdle… another one, and then another one. We do not want to wait until we are in our 50s, or, worst, 60s, and find we are like the 1⁄3 of Americans age 50 or older who still have no retirement savings. A recent study by Transamerica shows that even older Americans have not saved enough. In fact, the median amount of money saved by baby boomers was just $147,000, nowhere near the amount needed to retire these days.
But first things first—as CEO, you need to amass an emergency fund that can cover three to six months of household living expenses. This isn’t retirement savings . . . this is a life preserver that can keep your family afloat if something unexpected occurs and you find yourself out of income. In the corporate world, this is called cash reserves—only to be used when it’s absolutely needed.
Once you have done that, you should look closely at your monthly paycheck. Ask yourself what amount you can carve out within your budget to put toward your retirement savings. A CNNMoney.com article analyzed the results of giving your retirement a monthly paycheck. If you put away just $200 a month toward retirement, assuming an 8 percent return, starting at age 25, you will have amassed $622,000 in 40 years at age 65. This analysis highlights the value of time, as it also stated that if you start this savings just five years later, you will only have $413,000 at age 65. Think of that difference the next time you say, “I’ll start saving for retirement… just as soon as I pay off my car.”
When it comes to paying yourself, as CEO, you need to treat yourself as a valued employee. Start paying yourself now; don’t waste any more time. Also, pay yourself regularly. Would you allow your current boss to say, “Ya know, this month isn’t great for us, so we’re just going you skip your paycheck?” Absolutely not, so don’t accept that from yourself either.
The last thing to commit to is giving yourself incremental raises. Two hundred dollars might be all that you can afford initially, as you are putting food on the table for a house full of kids, but as your household expenses drop, allocate more to your retirement.
It’s hard to make the future a priority. There are so many things facing us right now that we want to spend our money on. But just for today, let me act as your CFO, and advise you that when you are 10 years into retirement, you would much rather have the savings necessary to maintain your lifestyle than the new pickup truck you want right now.
Be vigilant and stay alert because you deserve more. Have a great week.
1. http://tinyurl.com/zag2lrp; 2. http://tinyurl.com/jcwmh5c; 3. http://tinyurl.com/jcwmh5c