Now it’s time to get into the inner details of staying on top of your personal finance.
Specifically, it’s time to automate your finances.
In this chapter I’m going to show you proven strategies that you can use to easily run your personal finance, almost on autopilot.
Let’s jump right in.
Automating your finances
The #1 goal for staying on top of your personal finances is to: give you financial freedom.
… for you to be satisfied that every dollar that comes in goes towards the things in life that would make you free of money worries.
In other words, free you to do more with less.
If you constantly have to transfer funds into your savings account EVERY TIME your paycheck comes in, then you might find the “process of saving” difficult or just outright impossible.
Each time you choose to put money away for savings or investing, you’re using your limited willpower to make yourself do it… even when you don’t feel like it.
Every time that happens, you’re leaving a door open for you to come up with an excuse or reason to hold back from saving or putting the funds away.
This is why you should automate your finances.
It helps you to passively save and automatically manage your money and avoid any late fees.
Not only that: it means you never have to keep exercising your limited willpower to make hard (but good) financial decisions for every paycheck.
And automation works for paying your bills, putting money away for savings, or investing it.
Automation is also the exact reason why a lot of us don’t have issues with paying our taxes.
The tax is already deducted, before we get money in the bank. So it’s as if that tax dollars doesn’t even exist.
One more thing, before we dive into the steps to automate your monthly spending: The overarching theme is that before you start spending, you:
- Pay essential bills
And then, you can use the remainder to either a) save more, or b)spend on other luxuries that you want. (I recommend saving more).
How do you automate your finances, so you can pay bills, save, and invest, with little effort from you?
We’ll assume you get paid via your paycheck into your checking account.
And that you typically get paid the last working day of the month (say the 30th of every month).
The timing is key here. That way, you can send out the payments in batches… rather than having to keep up with multiple due dates.
1. First, talk to your company about getting your paychecks via Direct Deposit.
It’s a win-win for both of you.
Using direct deposit works great for employers, since it lets them handle payroll expenses very well, saves costs, and reduces the risk of stolen or fraudulent checks.
I recommend the Rewards Checking Accounts at Axos bank.
Using direct deposit saves you the time and hassles of having to deposit cheques. For the Rewards Checking account at Axos specifically;
- You only need a $50 balance to open an account
- Other than that, no overdraft, minimum balance, monthly maintenance, or non-sufficient funds fees
- You can earn maximum interest (up to 1.25%) when you have monthly direct deposits of $1,000 or more and use your debit card at least 15 times a month, with a minimum $3 per purchase
- You also get unlimited domestic ATM refunds
2. Next, let’s take care of our retirement accounts – mainly 401 (k) and Roth IRA.
Invest in both your 401 (k) and Roth IRA.
The goal is for you to max out both plans, thus setting yourself up for retirement success.
The main difference between your 401 (k) and Roth IRA is how each account is taxed.
With your 401(k), you’re investing with pre-tax dollars, which means you’re reducing the amount of your income that gets taxed for that year.
Whereas for your Roth IRA, you’re investing with after-tax money.
As a result, your withdrawals won’t be taxed upon retirement and any investment gains are untaxed.
Send portions of your paycheck to both your 401(k) and Roth IRA.
I recommend putting a total of 15% in your investment accounts: at least 10% to your 401(k) (especially if your employer offers a match), and another 5% to your Roth IRA.
Or better still, fund your 401(k) up to the matching limit, then invest in your Roth IRA. Move any left-over funds to your 401(k).
Since we want this automated, talk to your HR so they can set up automatic deduction for your 401(k).
And speak to your Roth IRA investment firm about how much you want deducted every month… so you can make automatic payments into your Roth IRA.
That way, both investment vehicles work the same way as your tax dollars – you didn’t see it, so it’s like the money never even existed.
3. So far, awesome! Now, we save.
If you’re using the “extreme saving” method – whereby you pay your strictly essential bills and then you save the rest, then yes: you can pay your bills first and then come back to save.
Otherwise, save first and then spend whatever is left.
If you can’t afford to use the “extreme saving” method, then I suggest you save at least 5%.
The secret to saving, and keeping your savings, is to tag your funds with your specific financial goals.
For example: “vacation home fund”, “emergency fund”, “car fund”, etc.
How do you do this in a savings account?
You find a savings account that lets you create multiple sub-savings accounts within your main account.
For this, I use the Capital One (CO) 360 Performance Savings account.
The CO savings account makes it easy for me to keep track of my savings goals. Even more, there are no monthly fees, no minimum fees, and you can get 1.00% savings interest rates to boot.
Recap: So far, we’ve set up direct deposit, set up our retirement investments, and savings… all automated.
Next, we turn to automating your monthly expenses.
4. Use your credit cards to automate paying your bills.
Beyond the hotel, frequent flyer, and cash back rewards that credit cards offer, I use credit cards mainly to track my spending and automate how I pay my bills.
Use your credit cards, instead of cash, so you can get an accurate record of your expenses.
And then use Personal Capital to track and analyze your spending.
For every expense you make, most companies let you charge your credit card every month.
Call up each of the companies, and ask to help set up automatic payments for you.
For example, you can automatically charge your Netflix bill on your credit card every month.
Lastly, set up your credit card to draw money from your checking account.
As a result, you can pay off your statement balance on your card at a specific date each month… long before your due date.
5. Set up automatic pay for other expenses.
For your expenses to small business owners who don’t accept credit cards (e.g. your landlord’s rent), you can set up automatic payments from your checking account to go out on a certain date of the month.
For example, you can use Bill Pay from your Axos checking account to send out automatic rent checks to your landlord by the 1st of every month.
In summary, I’m a big believer in “spending what is left after saving.”
That you have an extra $450 after you’ve saved, invested, and paid your expenses, doesn’t mean it’s time to spend the $450 on whatever catches your fancy.