Common Sense Living

Automate Your Financial Life

It’s a fact.  We cannot control ourselves.  As humans, we say one thing, then do another.  “I’m gonna lose weight this year.”  Yeah, right!  “I’m gonna save money.”  That’s harder than losing weight!  We make feeble attempts, then quit.

Losing weight is easy if someone else controls your food intake, or if it’s automated to be just the right amount.  Similarly, saving money is easy if it is automated, forcing you to live on only the remainder.  You cannot spend what you don’t have, or can’t get to easily!

There are three pools of savings you should consider automating:

  1. Retirement Savings
  2. Rainy Day Savings
  3. Emergency Savings

RETIREMENT SAVINGS:  If your employer offers a 401k, and especially if they match your contribution, it is best if you can contribute at least 10% of each paycheck to the pre-tax 401k.  If your employer matches the first 4%, that will be like saving 14% of your check, before you can even touch the money!  That extra 4% company match is free money handed to you simply because you saved yours!  Furthermore, you reduce your current tax bill.  When you take the money out of the 401k at retirement, your income will likely be lower then, as will the tax rate applied.  To participate in your company 401k, simply let your employer know you are interested, and they can point you in the right direction.

In addition to your 401k, you should also consider an after-tax Roth 401k, or an after-tax Roth IRA, allocating 5% to one of these funds.  With Roth funds, you pay taxes now, but the remaining money grows tax free until retirement.

Not all employers offer a Roth 401k, where you can have the money automatically removed from your paycheck for the fund.  If yours does not, you can open a Roth IRA with a mutual fund company such as Vanguard.  Then schedule an automated transfer from your bank every payday such that money is removed from your checking account the minute your paycheck arrives.

Using this approach, your retirement savings will be on auto-pilot.  By saving a total of 15%, PLUS any company match your employer hands you, your retirement account will build rather quickly!

RAINY DAY SAVINGS:  With the job market the way it is today, there will likely come a time when you will be unemployed.  Job security is not what it used to be, and you need to be accountable for your own security and peace of mind.

To save money for longer term rainy day needs, open a savings account with a trusted institution that will pay a reasonably high yield to make it worth your while.  I like GS Bank (a wholly owned subsidiary of Goldman Sachs), where you can open an online savings account that currently pays 1.2% interest.  That is substantially higher than the 0.1% interest your bank likely pays now for savings accounts.  Savings accounts at GS Bank are fully FDIC insured, so there is minimal risk to your money.

Set up another automated transfer to fund your rainy day savings, each and every payday.  I suggest another 10% go to this fund.

Once the fund reaches a value equal to 1-year of pre-tax income, you can then stop contributing to this account.  If you get a raise, remember that you will need to add more to the fund.

EMERGENCY SAVINGS:  At some point, your car will break down, you will need a new couch or TV, or some major repair will be needed on your home.  Whatever it is, you  want to be prepared for it.  Your emergency savings is for this purpose.

For emergency savings, open another savings account.  I suggest using a bank that is NOT your normal bank.  In other words, it will take some work to access your money.  Then, as with the other savings categories, set up an automated transfer from your checking account on payday to transfer 5% of your paycheck to this account.

If you need the money for a true emergency, such as a broken down car, you will have it available.

Conclusion: 

By automating savings, you don’t have to rely on your own willpower to succeed.  Using the method above, you will save about 30% of your pay…..automatically, and not have to push the panic button when the need for money eventually arises.

The hard part will be in curtailing your lifestyle to live on the remainder.  But if you don’t have the money to begin with, you will have no choice!  If we were given a choice, most of us will choose the path of least resistance, and will not achieve our goals.

Start early and automate your financial life!

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