Automating your finances isn’t rocket science, but it’s still the best way to save more and worry less. Here, our easy guide to automatic finances.
The most important factor in financial success is not having a budget, meticulously avoiding debt, or choosing the right investments. It is having a system that makes the right financial moves for you.
The decision to save money is both a personal and at the same times a financial decision. It’s personal because you make the decision, and it’s financial because you need to put away some money. Very often people find themselves stuck between what they are willing to do (i.e. save on a constant basis) and how to “execute” what they are willing to do.
The key is to put your Money on Autopilot
Switch to Direct Deposit
Knowing that your paycheck is going to show up in your account on a specific day is good for your peace of mind and it saves you from having to make a trip to the bank. If your employer offers direct deposit, all it takes to sign up is filling out a form and providing your bank account information. You can even split up the deposit over several accounts. It’s a good idea to send a certain amount of your pay straight to your savings so you don’t have to go back and transfer it over later on.
Set Up Automatic Savings
Have you opened a savings account in the past, but forgot to actually add money into it on a regular basis? Sometimes the biggest barrier to saving money is simply remembering to do it. One option is to set up an automatic payment from your bank account into your savings account at the end of each month (or weekly, if you get paid every week).
But if you get paid inconsistently (for example, if you’re a casual shift worker, contractor or freelancer) or your expenses change month to month, it can be hard to commit to a regular savings amount. Some banks offer tools that scan your bank account and savings account, and move money between each account depending on your capacity to save.
Laziness in Money Management
Sometime we do stupid stuff because we are emotional or tempted. And sometimes we’re just lazy.
If you currently pay for a monthly subscription that you don’t use a gym, a magazine, $12 a month for DVR service on cable and don’t do anything about it, whose fault is it? The recurring-subscription business model that gyms, cable companies, and Netflix use is one of the most stable and profitable in existence. And guess what? It is built on the simple fact that people are lazy. When we stop using something, most people will pay $20 or more each month for many months before making a 10 minute phone call to cancel.
Use spending categorisation tools
Not many people get excited by the idea of creating a spreadsheet to manually track their spending and expenses. This is especially true if you’re a self-confessed lazy person, like me. But in order to save money, you need to have a clear understanding of what you’ve got coming in and what’s going out (and exactly where it’s going). An easy way to do this is to use an app that automatically groups your transactions into categories for you.
Try hiding your Money from yourself
One way around this is to put the money someplace where it’s a little harder to reach, like a separate, dedicated high-interest savings account, or maybe staggered CDs. If you have an IRA or other long-term investments with a financial firm, you might want to set up an automatic investment to a non-retirement account there.
Emotional decision-making is part of the problem; pure temptation is another. If you have ever tried to resist a temptation to turn down an extra drink, to surf YouTube instead of working, to buy something you shouldn’t and failed, you know what I mean.
Psychologists have shows that although it is possible to stretch and strengthen our willpower like a muscle, our ability to self-regulate is a consumable resource that depletes.
A Simple Approach to put your Money on Autopilot
As you get older, your finances will get more complicated whether you want them to or not. So the simpler you can keep your financial system, the better. Two primary accounts one checking and one savings should suffice unless you own a business or are married with separate finances.
The Three Steps to Automatic Finances
- Put your savings on autopilot
- Put your bills on autopilot
- Put your investments on autopilot
Put your Savings on Autopilot
The first step in putting your money on autopilot is to pay yourself first. This means directing a portion of the money you earn into a savings account as soon as you earn it.
- If you’re still working on your emergency fund, put this money towards that.
- If you’re in high-interest consumer debt, put this money in an account that automatically makes extra payments on your debt each month.
- If you’ve funded your emergency fund, then put this money towards your next life savings goal (e.g., a house, a car, a wedding, or a vacation).
- If you’re set on cash, skip this step and focus on investments instead.
Put your Bills on Autopilot
In part one of this series, I talked about your “nut”, the fixed monthly expenses like rent, insurance, and student loan payments, that you pay every month in the same amount. Once you have a comfortable bank account buffer™ in place, the next step in putting your money on autopilot is to setup automatic bill payments to each of these bills. There are different ways to do this, and I rank them in order of my preference.
Put your Investments on Autopilot
Once you have your savings and bills on autopilot, the last (but I would argue most important) step is to set up automatic investing. We will cover this in detail in part four of this series.