How to Automate Your Finances
If you want to reach your debt-payoff goals, your savings goals, and your retirement goals, one of the most important things you can do to help ensure your success is to automate your finances, particularly your saving and investing. The reason that automating your finances is so powerful is that it takes willpower out of the equation. And even the most disciplined of us only have so much willpower. That’s why it’s better to put systems in place in your life where you can set it and (mostly) forget it. It makes the likelihood of success much higher. In this article you will find 7 steps to help you automate your finances to save money, get out of debt, pay your bills, and invest for future wealth.
1. Set up direct deposit.
The very first step as you begin to automate your finances, if you don’t have this done already, is to set up direct deposit with your employer so that your paycheck is deposited automatically into your checking account. This will prevent you from being tempted to spend any of the cash you receive right away, before you have time to allocate your money to the places where it needs to go according to your monthly budget. (More on that below.)
2. Transfer money directly into savings.
The next step as you work to automate your finances is to transfer a certain amount of money each paycheck into savings. So let’s say you just barely created your new budget, and after reducing spending on your groceries, eating out, clothing, and entertainment, you now have $300 a month to start with that you know you can put toward building your initial, starter emergency fund. So with the money from your first paycheck (if you get paid twice a month, for example), set up automatic transfers with your bank to transfer $150 directly into your savings account designated as your emergency fund.
If your bank or credit union doesn’t offer very good interest rates on savings accounts, look into Capital One 360. We’ve been banking with them for 14 years (from the time when they were still ING Direct), and they’ve been a great bank for us (despite my reservations when Capital One bought them). One of the things that I love about my Cap One 360 account is that you can have multiple savings accounts for your various savings goals (we have more than 10). And one of those is our emergency fund. They also have one of the best interest rates around.
If you have the option to set up your direct deposit from your employer so that you can deposit money into more than one account, then you should transfer a certain amount of money directly from your employer into a savings account each paycheck unless you are working on paying off nonmortgage debt.
In addition to saving for you emergency fund, as soon as you can work it into your budget by continuing to reduce your spending, you should also start saving for larger, irregular purchases and expenses, such as saving up for appliance and furniture repair and replacement, car repairs and replacement, home maintenance and enhancements, Christmas and gift giving, vacations, and a down payment for a home purchase. And again, the best way to do this is automate your finances in order to take out the need for discipline as much as possible. When you’re just starting to budget and are used to living paycheck to paycheck, you may not have much money for these different categories, but as you get your debts paid off and as your income increases over time, you will be able to find more money in your budget to save up for these things so that you can fund them yourself rather than relying on credit card and other debt.
3. Transfer money automatically from your checking account to pay off debt.
Once you have at least $1,000 in your emergency fund (or up to one month’s worth of expenses, if you’re in a situation where you want a little more of a buffer), then you should automate your finances in such a way that you can start working diligently to pay off your nonmortgage debt.
You can take the money that you were paying to fund your mini emergency fund and use that to start paying extra on your debts. So if you had gotten to the point where you were able to put $500 toward your emergency fund each month, for instance, then you would use that same amount to pay toward your debts. So you would set up an automatic transfer from your checking account to start paying off your debts as fast as possible.
There are two methods you can use to pay off your debts more quickly: one is the snowball method, where you pay minimum payments on all of your debts except for the smallest one, and you then throw all available money at that smallest debt to pay it off as quickly as possible. Then when it’s paid off, you move on to the next smallest debt, and so on. The avalanche method is where you pay minimums on all of your debts but throw all money that you can at the debt with the highest interest rate, and pay it off as quickly as possible. Once you pay off that debt, then you work to pay off the debt with the next highest interest rate, and so on.
For most people, I recommend using the snowball method because it has the benefit of helping to keep you motivated as you are able to more quickly pay off smaller debts. However, if what will really keep you motivated is to work on pounding down the debts with higher interest rates, then use that method. Just do whatever will help you stay motivated to reach your financial goals and win with your money!
The benefit of building at least a small emergency fund and then paying off all of your debt before you work on other bigger and more long-term financial goals is that you build a strong financial foundation that will allow you to gain financial stability and better reach those financial goals. Then the beautiful financial tower of wealth that you are going to build over your lifetime will not crumble like a house of cards. And unfortunately, I bet you know people who have had exactly that happen to them because of poor financial planning, when they didn’t have an emergency fund to fall back on.
4. Transfer money directly into your 401(k).
Once you have paid off your nonmortgage debt and built a fully funded emergency fund of three to six months’ worth of expenses, then the next thing you should focus on as you automate your finances should be to start saving 10 to 15 percent of your income for retirement. (Work up to 15 percent as soon as you can.) If you receive a company match for your retirement investing, then you should start with your company 401(k) or Roth 401(k) (or similar) plan, and have the amount matched by your company automatically taken out of your paycheck and invested in your company retirement plan.
5. Transfer money automatically into Roth IRA or other retirement investment accounts.
Once you have invested up to your company match in the company retirement plan, then automate your finances so that any additional money above the company match (up to 10 or 15 percent of your income) is automatically transferred to a Roth IRA. Use direct deposit into a Roth IRA, if your company offers direct deposit into bank and investment accounts, so that your money will be invested automatically before you ever even see it or get tempted to use it for other things.
If you do not receive a company match, then have all money designated for retirement saving automatically transferred from your paycheck to invest in a Roth IRA instead, if you can do that. If you can’t have money from your paycheck automatically deposited into your Roth IRA account, then use automatic withdrawals by your brokerage firm to accomplish the same thing. If you cannot invest the full 15 percent into your Roth IRA and the Roth IRA of your spouse, then look into putting the rest of the money designated for retirement into non-tax-advantaged accounts. (But invest as much as possible into tax-advantaged accounts as you can first.)
I have been investing with Schwab for my Roth IRA for years, and that is where we have our nonretirement investment accounts, as well. They’re a great brokerage firm because of their amazingly broad range of low-cost mutual funds available to invest in and their great customer service. We also have nonretirement investments with Vanguard. They are a good company as well, but personally I prefer Schwab. They just seem to make investing easier, perhaps largely because I feel that their website offers a better, more intuitive user experience.
Once you begin investing for retirement, I recommend that you sign up for a great free app called Personal Capital in order to track your progress toward reaching your retirement and other financial goals. With Personal Capital, you can see not only all of your bank checking and savings accounts and even your credit cards and other finance accounts, but you can also link your retirement and regular nonretirement brokerage accounts. This allows you to have a complete, overall picture of your current financial situation. And you can also view your account history to see how your accounts and overall portfolio have done over time. I love this very helpful tool and use it regularly! Sign up for your free Personal Capital account here.
6. Automate your finances by transferring money automatically into additional savings accounts to save up for larger purchases and expenses.
As mentioned above, particularly once you have your emergency fund in place and you are out of nonmortgage debt, you should automate your finances to start saving for larger expenses and purchases, such as replacing your car with one you buy for cash, replacing appliances and furniture, doing home maintenance, paying for vacations and Christmas and other gift giving with cash, and so forth.
7. Transfer money automatically into nonretirement investment accounts for additional wealth building.
Once you have saved at least 15 percent of your income in retirement accounts and (in most cases) after you have paid off your home, you might want to automate your finances to invest in additional nonretirement investment accounts to build additional future wealth. Or if you have not yet purchased a home and you have a time frame of at least five years before you intend to buy a home, then you might consider using investment accounts for your future home purchase.
Especially if you’re intending to follow the 100 percent down plan (in other words, you decide to buy your house with cash to avoid a mortgage! :D), then your time frame may be longer and investing your money in good stock mutual funds in the meantime can be a good way to go. This is what we are doing as we save up to purchase our next home with cash in about five to eight years—we’re investing what used to be our mortgage in stock mutual funds with good long-term rates of return until we have the money needed to buy a little bit larger, nicer, newer home with cash. #debtfreeforlife
Begin your path to automatic wealth building today: See an example of how to automate your saving, debt payoff, and investing.
One of the best things you can do to help ensure that you consistently work toward and reach your financial goals is to automate your finances in such a way that it helps you succeed. One of my all-time favorite financial books is The Automatic Millionaire, by David Bach. If you want to win at money, you need to take willpower out of the equation as much as possible and replace it with a system that won’t allow you to fail.
So, let’s say, for example, that for now you have four main savings goals that you want to work on: you want to pay off your credit card debt, build up a three-month emergency fund, start saving for retirement, and start saving to purchase a five-year-old car in a couple of years. This is how you could go about doing that:
Set up direct deposit. First, automate your finances by setting up direct deposit with your employer if you possibly can and if you don’t already have it set up (for convenience, but more important, so that you won’t spend money right from your paycheck that would have been better off going to something else more important).
Then, set up an automatic transfer from your main checking account into a separate savings account that will be used for your emergency fund. Transfer as much money as you can each paycheck into this EF savings account until you have at least $1,000 but up to one month’s worth of expenses in this account.
A great way to do this, if your current bank doesn’t offer the option of having multiple savings accounts linked to your checking account, is to open a savings account (and then more savings accounts, as you are ready to use them) with Capital One 360. We currently have over 10 different savings accounts for our various savings goals, and I love knowing that I won’t accidentally spend the savings for one item or category on something else.
In order to build up your initial emergency fund as quickly as possible, see if you can sell anything around the house or in the garage that you don’t need. And look into ways to earn extra income.
Then after you have a small starter emergency fund in place, further automate your finances as you work toward paying off all of your credit card and other nonmortgage debt, and get that paid off as quickly as you can, as well. If you haven’t gotten a second job or side hustle (such as blogging! There is awesome earning potential :)) before this time, consider getting one now so you can get out of debt sooner. To begin paying off your debt, automatically transfer the money that was going into your emergency fund toward paying off your debts.
There are a couple of ways you can do this: attack your highest-interest debts first or your smallest debts first. You can do whichever will help you to best stay motivated, but my recommendation would be to attack your debts smallest to largest because of the quick wins that you get and the extra motivation that gives to stay focused and keep working on getting out of debt. As you work to pay off all of your debts, reexamine your spending, and see if there are places where you can cut your spending in order to get out of debt sooner. Here are some ideas of how to reduce your spending.
Then once you have paid off all of your debts, continue to automate your finances by transferring more money into your emergency fund, until it has at least three to six months’ worth of expenses in it. In order to save more money toward your emergency fund, take all of the money that you were using to pay off your debt and now use it to fully fund your emergency fund. Try to fully fund your EF as quickly as you can—in three to six months if you can. And then you can begin investing for retirement, saving toward your children’s college, and saving (to pay cash!) for large purchases such as a newer vehicle, awesome family vacation, new furniture, and more.
Once you have a fully funded emergency fund, start saving money in your 401(k) at work (or Roth IRA or other retirement account available to you), or increase your contributions, to at least 10 percent (and, if possible, 15 percent) of your income. Here, again, automate your finances by setting up automatic electronic transfers so that the money will leave your paycheck before it has the chance to get spent.
Then, once you have invested enough to receive the full match from your employer in your Roth or traditional 401(k), invest the rest of the money allotted for retirement savings, until you reach 10 or 15 percent of your income, in a Roth IRA. The reason to invest in a Roth IRA once you have invested enough in your 401(k) to reach the match is that you will likely have a lot more options available to you through a brokerage firm that offers Roth IRAs than you do through your company retirement plan. And that means you should be able to earn higher returns. For more information on investing for retirement, read this article.
Finally, at the same time as you are working to increase your retirement account contributions (or sooner, if you can fit it into your budget), start saving for larger purchases and expenses. For example, begin automatically transferring money each month into a savings account for that used car that you want to buy in a few years to replace the one that you are currently driving, that I mentioned above. If you can save $200 a month toward the car that you want to purchase in two years, then you would have about $5,000 to go toward that newer car, plus the amount that you can sell your current car for at that time—let’s say that that was also $5,000. So that would give you $10,000 to buy the five-year-old car. So you would transfer automatically each month that $200 into a savings account, and allow the money to grow for the next couple of years.
And that is how you automate your finances in order to save, pay off debt, and invest in order to gain financial stability and build wealth.
Automating your finances is one of the best things that you can do to save, pay off debt, and invest for the future. When you automate your finances, you set up systems that help you to reach your financial goals effortlessly, and you take the temptation to spend the money on other, short-term pleasures out of the equation.
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