Pay Yourself First


Shearwater Capital was founded in 1999. During the past 14 years, we’ve had an opportunity to observe which factors have contributed the most to our clients’ success in saving for retirement. The best predictor of long-term investing success is simply getting in the habit of making regular contributions to your investment accounts. Although most of our clients participate in their employer-sponsored retirement plans, this is usually not sufficient to ensure a comfortable retirement. Supplementing your qualified retirement plan with contributions to your personal after-tax account greatly increases your chances of having an adequate nest egg at retirement.

Some people seem to have an innate desire to save on a regular basis. They typically contribute regularly to their after-tax account, often by establishing an automatic deposit that transfers a specific dollar amount from their checking account to their investment account each month. This approach has several advantages. It assures that you add to your savings regularly without having to think about making a phone call or writing a check. It also tends to be self-reinforcing because you get positive feelings from watching your account grow over time.

Others find it more difficult to save. Despite their best intentions, they seem to find reasons to put off contributing to their investment accounts, most which sound perfectly reasonable. They have to pay off loans, save for a house down payment, buy some furniture, etc., but unfortunately, the regular monthly savings just never happens. Another common justification for failing to invest on a regular basis is concern over market conditions. For example, we have recently enjoyed an extended run of positive stock market returns. Most investors realize that this can’t last forever and they worry about putting more money into a market that may be on the verge of a correction. This is a form of market timing, which history and academic research has shown to be a poor strategy for most investors, simply because no one can consistently predict the future direction of the market. If anything, making regular contributions to your investment account should help you ride out the inevitable market volatility because you get more for your money during market downturns, a strategy referred to as dollar cost averaging.

There is an old financial planning adage that says “pay yourself first.” This means that the first check you write each month should be to yourself, in the form of a contribution to your investment account. After all, what monthly bill is more important than that? It takes time to harness the power of compound interest, so the sooner you start, the better off you will be. We would be happy to help you set up an automatic monthly deposit into your investment account. Even if you have an unpredictable cash stream, there should be some minimum monthly deposit that is feasible. You can always increase your contributions when you have extra money. This simple step may be the most important one you can make on the road to long-term financial security.

As always, please feel free to contact me with any questions or comments.

Jeffrey J. Brown, MD CFA Principal, Shearwater Capital

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