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.
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?