How to Automate Your Finances: The Set it and Forget It System

 in Blog / Budget / Invest  tagged auto-invest

Conventional wisdom will say that motivation is the key to changing our habits. “Maybe if you wanted it badly enough, you would make sure it gets done.”

 But let’s get real, what we really want is the path of least resistance. We want to take the easier route. 

Many “productivity gurus” will tell you this is a dumb strategy. What they fail to recognize, is that it is actually a smart strategy. 

Why? 

Our energy is finite and precious. It is in our nature to conserve as much of it as we can. The key to understanding this is that we all gravitate towards the path of least effort. 

If you are deciding between two options, and one of those options reaps the same result but is much easier, which do you think you will choose? 

You will always choose the easier option. 

We want to find the option that brings us the highest return with the least amount of effort. Every person on this planet is motivated to do what is easy. 

In other words we want it easy like Sunday morning (whatever that means). 

The same goes with our money. Every action requires effort. The higher the effort you have to put out, the lower the chances you will actually take action.  Each effort used on something that does not produce value, creates an additional obstacle in your life. 

You are obviously capable of doing hard things. The problem lies when your willpower becomes fatigued. You have to set a plan in place. 

How to Make Money Management Simple 

So how do you combat this when it comes to our money? 

We automate. Then, we automate some more. 

Trying to force motivation when something gets hard is like trying to stuff two pillows into one pillowcase. You can probably do it, but it is going to take a ton of effort (*thanks to my weird brain for that analogy). 

Nobody wants to burn extra energy dealing with their money. It’s boring, cumbersome, and can cause burnout. 

Automating reduces any friction. Making it easier for you to save and invest more. 

Imagine waking up everyday knowing your money is going where you need it to go without lifting a finger.

That leads to a powerful financial life on auto-pilot. 

Habits are for suckers and systems are for winners. This is a proven system that I use week in and week out. I don’t spend hours per week on this. 

In fact, I spend an hour a month on my personal finances with this system. 

Let me show you how I do it. 

What is Automating Your Finances?

Automating your finances is a way to easily ensure that all of your financial responsibilities get done. Thanks to technology, you can automate almost any part of your money. 

Some automation you are most likely already doing. Your paycheck is most likely automatically deposited into your account. You may auto-pay your power bill. Or, you automatically invest in your company’s 401K. 

These are all great but the world of automation can be so much more than that. I am going to show you my surefire automation system. That way, you can mimic exactly what I do. 

What is Auto Investing? 

Auto-Investing works the same way. You set up a brokerage account and have money automatically deposited each time you get paid. If you want to really make it easy, you can have your money automatically invested in a mutual fund, ETF, or Index fund. Take your company 401K for example. You get paid and whatever you contribute automatically is transferred and invested each paycheck. 

Why Would you Want to Auto-Invest? 

Auto-Investing keeps you grounded. Your money gets transferred right when you get paid. This allows you to invest without the temptation of spending your hard-earned cash. We all have a big baller brain, and spending money is all it wants to do. Eliminate the risk that your money will float away on crap you don’t need, by investing automatically. 

Here is How I Do It

AUTOMATE YOUR Money

I am going to show you how I manage my money without lifting a finger. If you follow these steps, you will be well on your way to building wealth.

Set Up Direct Deposit 

Everyone should be receiving direct deposit. It’s by far the best way to get paid, and probably the most common form of money automation.  Over the past 20 years, many companies have made direct deposit the norm. It is instantaneous, safe, and eliminates paychecks getting lost by the employee. 

If your employer offers direct deposit, you can set it up by filling out a simple form with your bank information. 

Auto-Invest in Your 401K 

Man on computer smiling.

If your company offers a 401K, you want to take advantage of the opportunities it can offer. A 401K is an account that you can open through your employer that allows you to invest money before it is taxed. It has a number of great tax advantages. 

At the very minimum, you want to make sure you get your companies match. This is a specific amount that your company may offer to match your contribution percentage. This can usually be found in your employee handbook. 

So, if your company offers to match 3% of your salary, then you need to contribute at least 3% of your pay to your 401K. 

Why you ask? 

Let me find a rooftop I can shout this from. 

BECAUSE IT IS FREE MONEY! 

Ah, glad we got that out. It was really weighing on my chest. 

Not taking your company’s match is a disservice to yourself. They are offering you a tax free pay bump and you are not taking it. If your company offers a 3% match, then contributing 3% of your money will ensure you save 6% of your salary, tax free. 

Simply, register with your company’s 401K provider, then put in the amount needed to match the free money they are offering you. Wammo, you are automatically investing a percentage of your salary.

Auto-Invest in Your Roth IRA

Now, we want to invest in our Roth IRA. I have talked about how to become a Roth IRA Millionaire in the past, which is why I truly believe everyone should be shoveling their hard dollars into this glorious tax-advantaged fund until they max it out. This is for a few reasons. 

Our friend the 401K is obviously a great tax advantaged account because you don’t pay taxes going in, but you do pay taxes going out. That means you will pay tax on the growth. 

The Roth IRA, you pay taxes on the money you contribute, but it grows tax-free. So if you have a long time horizon, having investments that can grow and won’t get hammered by taxes is a huge advantage. The current max is $6,000/year and always going up. 

If you don’t have a Roth IRA, you can open one with M1 Finance (that is an affiliate link). 

Then automatically contribute to your Roth IRA  each time you get paid. So if you get paid bi-weekly, you can set up a contribution to your Roth IRA, every other Friday.

To Max out your Roth IRA, you would need to divide the number of paychecks you get by $6,000. 

Here is a breakdown of how much you would need to contribute to get to the max. This will help you when setting up your automation. 

Bi-Weekly: 26 paychecks / $6,000 = $231 per check 

Weekly: 52 paychecks / $6,000 = $116 per check 

Twice a Month = 24 paychecks / $6,000 = $250 per check 

Monthly = 12 paychecks / $6,000 = $500 per check 

Automatically Transfer to Your Savings Account 

Automatically building up your cash savings is your next step in automating your savings. If you don’t already have a cash buffer, then automating this process will make it really easy for you to save. Look for a high-yield savings account. Typically, online high-yield accounts will give you a much higher interest rate than your local bank can provide (Capital One, Ally Bank, M1 Finance are all great.) 

Your savings account can be used for a number of savings goals.

Saving for a down payment. 

Building up your emergency fund 

Saving for a new car. 

The goal here is to make sure your cash reserve is ready. If you do not already have an emergency fund, it is recommended to save up for that first. Try to get your first $1,000 set aside as a small win. 

Then, you want to save up 6 months of expenses. This protects you from a job loss, furlough (pay freeze), or anything else life can throw at you. 

It is not a matter of if you will need your emergency fund, it is a matter of when you will need an emergency fund. 

Set-up Payments for Your Bills

Here is what I do. I set up every single bill on a credit card. The only bills that won’t allow me to do this are my mortgage, water bill, and power bill. I set up auto-pay on my credit card on a weekly basis. 

Why weekly? 

It allows me to see exactly how much cash I have on hand in real-time. Credit cards get out of hand for people who don’t know how to track their spending. Maybe this sounds familiar to you. You wait too long to pay off the card and to your surprise, you overspent. 

Automating your finances is so powerful because it makes sure your money goes into the right places at the right time. But, if you wait too long to pay your bill, you may overspend. This is why we want to pay off the credit card weekly and monitor spending. 

Putting your bills on a credit card allows you to accumulate points (free money). You can use those points for travel, cashback, or other purchases. 

Set-up Payments for Your Student Loans or Debt 

Paying down debt is a key component to building wealth. Automating your debt payments ensures that you never miss a single payment. 

You want interest working for you, not against you. Debt has interest working against you. 

So we want to get rid of it ASAP. 

When you automate your debt, look to pay more than the minimum payment. As you get raises, you can increase the amount you pay each month. This will help accelerate the process of getting rid of debt once and for all. 

Automatically Track Your Spending 

You always want to have a grasp on how much you are spending. This allows you to invest and save more money. If you do not want to manually enter every transaction on a budget, rest assured there is a better way. 

There are tons of automated budgets now. 

Tracking your spending automatically can now be seamless. You can do this with something like the free app Personal Capital.

All you do is link your accounts to Personal Capital and they will budget your money automatically. 

Increase Your Automatic Transfers When You Get a Raise 

Nothing is better than that feeling when you get a significant raise or a promotion. Once your new pay amount hits your bank balance you have a choice. 

Do you increase your savings rate or inflate your lifestyle? 

People who never want to get ahead will increase their lifestyle. They will buy a bigger house, or fill their existing house with more stuff. 

What millionaires do is increase their savings rate. This is a proven way to get rich. 

By all means, celebrate and treat yourself. But make sure you pay yourself a raise too.

An increase in income means nothing if you don’t keep some of it. If you spend it all on your new lifestyle, it is a wash and you are back where you started. 

When you get a raise, increase your automatic contributions to your savings account, brokerage account, Roth IRA, and 401K. This will ensure you stay balanced financially. 

andrew
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