Remembering the “Pay Yourself First” Rule

Before my husband and I went self-employed, I had a 401k and hubby had a pension plan building up. Those went bye-bye when we did. So we had to stop technically paying ourselves first, but we are looking into how to do that again.

Planning for Our Retirement

Our main retirement accounts are our two Roth IRA funds right now. We make sure to fully fund them, but that’s only $11,000 a year currently. Our paid off rental house is part of our long-term plan too. But we are ready to start hitting the financial independence goal even harder. No matter what, we want to be ready to make the leap by the time the normal retirement year deadlines arrive, but ideally, we would like to get there by our mid-late forties. With that in mind, we have to decide how to actually hit our target.

Options for Our Money to Invest

On average, we usually have about $10,000 extra each year after all of our expenses and the Roth IRA savings. Some years we may have less and some we may have more, but I think that is a realistic average.

We could open up a SEP IRA and contribute $10,000 a year, which would lower our tax liability by $10,000 every tax year too. That could mean about $2000-$2500 a year in tax savings.

Or we could set the $10,000 aside for 2-3 years and put 20% down on another rental house. With the rental property, we’d be looking at another $1000 a month or so in total housing costs. But we could rent it out for $1300 or so per month. So we’d be bringing in about $300 per month, or $3600 a year, in extra rental income. But our overall living and saving costs would be increased to about $8500 per month, so whenever one of our rental homes wasn’t being lived in, it would be stressful.

Putting Off the Decision

I’ve mentioned this decision before but said we would wait until late 2013 or early 2014 to choose one path or another. The problem is that the point is moot right now until we get our emergency fund built back up after all of the dental expenses. That could technically be as soon as January 2014, but I am betting it will be closer to May. And even then, I am not sure which way we should go.

So, SEP IRA or another rental house? Which one sounds best to you?

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28 thoughts on “Remembering the “Pay Yourself First” Rule

  1. I think we’re kind of in the same boat. After looking at rental properties recently, we’ve decided to wait at least until spring unless something good comes up for a low price. We’ll see how we feel then. Do you know much about SEP IRA vs solo 401k plans? That’s what I need to research next.
    Kim@Eyesonthedollar recently posted..My $600 Ski PlanMy Profile

    • I emailed you, but figured I’d answer here too. We spoke with a tax lawyer a couple of years ago, and all I remember is that he made sure we understood that a SEP IRA was easier for us and would help us squirrel more away.

  2. Only once in my life have I been able to do this. It was when my husband and I first married and we were both working. We had enough money coming in to pay the bills, buy things we wanted (not just needed), eat out a couple times a week, and put money into savings! I don’t know if I’ve just got some bad money mojo or what but we just don’t seem to ever be able to get past having to struggle for money. Part of the problem is that only one of us is working and it’s a constant struggle to make ends meet.
    Mrs. Accountability recently posted..How to Automate Your FinancesMy Profile

    • Yeah, I can understand that struggle if only one person is working. If Mr. BFS or I stopped contributing, we’d be out of savings really fast. Good luck, chica!

  3. I love property so would probably go with the rental. I plan on getting a rental next year. Harder as a single mum than it was when I was married, but still doable.

    I think having a mix of investments is important and you know what works for you.
    Kylie Ofiu recently posted..9 ways to advertiseMy Profile

    • I sort of know what works…but rental property horror stories still scare me, lol. Good luck with your first one!

    • They can. We’ve been extremely lucky with our first rental – great tenant, always pays, only minor maintenance, etc. But we know that it could all go wrong really fast and then we’d just sell.

    • I like it too, so this is the way I am leaning right now. Or maybe split the savings and get the rental property a little slower while still saving something in the SEP IRA…

  4. I’ve recently started thinking about rental real estate – now that we’ve fully paid off our existing home mortgage. This seems like a great way to supplement income and build wealth. For me – I just need to consider and potential consequences in doing this while also trying to get every possible financial aid dollar for my kids (who are entering or will be entering college soon).
    Lance recently posted..Seven Ways To Use Music To Transform Pain, Isolation and GriefMy Profile

  5. I am not an accountant, but as I understand it, your yearly contribution to your SEP IRA is limited by your net income. Not gross, but net income. So even if you make a lot of money, if your net income is low because of deductions and credits, you won’t be able to put that much into your SEP IRA.

    So my advice is to do both, because a SEP IRA may not take up that much of your extra cash.
    Bargain Babe recently posted..Monday Freebies – Free Fragrance SamplesMy Profile

    • I do think we are leaning towards doing both. As for the net income thing, that’s actually about 70% of what we make since we can only take the standard deductions and the business has low overhead.

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