Will power just doesn’t get the job done. Sure, on a day when you are feeling particularly noble you might set aside an extra $50 in your savings account or pay an extra $25 on that credit card debt. But, if you are like most of us, starting a plan and sticking with it gives you all the progress of a yo-yo. Want to hear some good news? You can circumvent will power by automating your way to wealth. Why does automating work? Because if you don’t see the money, you learn to live without it.
Follow these five steps:
1. Establish your budget.
No one can win with money unless they have a handle on their income and outgo. Whether you use a yellow lined pad or slick software such as Quicken 2011, just do it.
2. Automate your pay check.
Yes, you want it to be directly deposited, but (depending on your budget and your goals) you may be able to have it directly deposited into more than one account.
3. Automate your debt.
Set up a separate “dump debt” account and, if possible (see step two), have part of your pay check deposited into this account every month. If this can’t be done, have a set money transfer automatically from your regular checking account into your “dump debt” account each month. The exact amount is based on your budget, but by making it automatic you move from theory into reality. You will learn to live on whatever you have budgeted and everything you have planned for debt reduction will actually go toward debt reduction. Oh, by the way, use your dump debt account every month to actually dump debt.
4. Automate your savings.
Once your debt is dumped, you can start saving with the money that had been going to debt reduction. One critical factor to saving: know what you are saving for. Why is this critical? Because if you save simply because saving is a good idea, you are setting yourself up to look at that savings account and impulse spend on that new leather couch you “just had to have” or that fishing boat “you have always wanted”.
Here are some savings ideas:
- Emergency Fund. You need a minimum of three months expenses in an emergency fund. Six months is better and nine months is great. Set up an emergency fund account and have your savings automatically deposited every month.
- Christmas club. A very simple and effective way of automating: have your bank automatically withdraw from your working account and deposit into your Christmas club account.
- Non monthly expenses. How often do you pay your auto insurance? Every three months? Your home owners insurance? Every six months? Your real estate taxes? Annually? If you aren’t intentional about setting this money aside, it will disappear. Establish your own escrow account and have the money automatically deposited into this account so it will be there when you need it.
- Car fund. You DO save and pay cash for your autos don’t you? If not, now is the time to start. Now that you are out of debt (step 3), keep driving your same car and start making those same payments to yourself. Make it automatic of course.
5. Automate your investing.
Most jobs, via their tax advantaged retirement plans (401k or 403b or 457), make automating your investments quite simple: simply sign up, pick your investment options, and the rest is done for you. However, if you aren’t getting any match from your employer, you should consider using your own traditional IRA or Roth IRA (always keeping those IRA contribution limits in mind). Again, make it automatic by having the investment automatically drafted from your personal account every month.
Bonus investment tip
Not investing enough? Start increasing those investments by one half of every pay raise you get for the rest of your life. You will learn to live on what you keep and, over time, those investments will become substantial.
Closing thoughts
The reason so many of us struggle with our finances is because we try to do it ourselves. We might do all right for a while, but then life deals us a hiccup and we make an exception “just this once”. When this pattern repeats itself a few times, we get discouraged and give up. If you automate your money, the will power and emotional roller coasters are removed from the equation; you simple live on what you have after the automating is done.
Over time, you will automate your way to wealth.
What parts of your budget do you automate? How has it helped? What automating ideas have I missed?
photo credit: aldenjewell
I automate just about everything. I hate writing and mailing checks when I don’t have to.
Savings for college is automated too, and I also have a certain amount deducted and put into my smarty pig account for taxes. Also, any spare money I have goes into a separate vacation account at smarty pig, but I do that myself as the amount is variable.
I absolutely like the idea of automating as much as one feasibly can. You reduce the will power component of saving to the decision to automate, as opposed to periodic choices that can test people’s self- discipline.
Also, the concept of separate “escrow” accounts is a very practical idea. It’s one that I have given thought to over the years, but haven’t really executed in a broadscale way. It’s certainly logical.
Squirrelers,
We actually do this automating in one form or another. We don’t have a dump debt account because we don’t have debt. And we combine our emergency fund with our “escrow” account, although it would probably be better to keep them separate. But the point is that it is all done automatically…no will power required.
Great tips (as usual)! We automate everything, although we do not have a separate “debt dump” account. We have 2 savings accounts and try to transfer non-debt money out of the checking account.
Joe,
Automating our finances (out of sight – out of mind) is a great tool to use. We believe you published something not too long ago about using the envelope system which can serve to automate our financial habits. Automating our finances and our financial habits can create an awesome combination to create financial independence. Great post!
@Khaleef,
We never had an actual “dump debt” account either, but I think it could really help those struggling with making consistent debt payments. Do you transfer the money “manually” from your checking to savings, or do you have it done automatically?
@Steven and Debra,
You hit my hot button when you mention using the envelope system. My wife and I have done so for years and are convinced it is the number one tool to move our budget from theoretical to reality. The post you referred to is Envelopes: The Glue That Holds Your Budget Together.
As always, I thank you for reading and sharing your thoughts.
@ Joe,
We make the transfers automatically – scheduled for every other Friday. We even have church giving and rent set up with our online billpay service at the bank.
However, we are still working on months that I receive 3 paychecks – ideally the entire amount would go into savings, but we really have a 2-week budget.
@Khaleef,
Automatic transfers…perfect. I haven’t considered automated online church giving (our church isn’t that high tech anyway). We still do that old fashioned thing called writing paper checks. 🙂
We give with checks through online banking. If the vendor you set up doesn’t accept electronic transfers, the bank will just mail a check. You pick the delivery date and usually the check arrives on or close to that date. The thing I like best is that they will deduct the money from your account on the delivery date even if the recipient takes 2 months to cash it! So, your balance is always accurate!
Thank goodness for automation! Automating my finances have been so easy. Most of the time I don’t even remember that I’m putting away a portion of my income into a savings. It’s pretty neat. Something I’d definitely recommend to those who are on the fence about it.
@Khaleef,
You just taught me something: I had never heard of banks automatically sending checks to vendors who don’t accept electronic transfers. I will probably continue to manually write church checks…it helps me enjoy the acts of giving. But there are surely other instances where that tip could help. Thanks!
@Mandy Jane,
Thanks for the “automating testimony”. READERS: Pay attention to Mandy Jane!
What a great resource!