Automate your finances to be stress free
How great is it to pay your Netflix, gym membership, cable bill and cell phone plan without even thinking? Back in the old days you would have to write a check, buy a stamp, send it out and balance your checkbook. And then repeat this every month! That sounds like so much work compared to modern day payments by automatic bill pay.
I try to automate as much as I can to never miss a bill, always keep my credit above 800 and minimize money related stress. After reading "The Automatic Millionaire" & I Will Teach You to Be Rich (both are highly recommended) I decided to implement automation into saving and investing. It was clear that automation was one of the easiest ways to hold myself accountable and have a plan for any money that comes into my bank account. Automation also does two very important things:
- Pay Yourself First: Most people get a paycheck, spend their money on groceries, bills and bar tabs before ever actually saving anything. Once the money is gone they wait anxiously until the next paycheck only to repeat the process.
- Eliminates The Temptation: As noted in the previous example not automating your finances will test your willpower and everyone only has so much will power to not spend their money. I'm guilty of this as well.
As Warren Buffett has said repeatedly " Do not save what is left after spending, but spend what is left after saving." Let's breakdown how to automate your personal finances to ensure you're saving a portion of each paycheck.
401K's are great for many reasons; tax deductions, employer match, ease of setup and also automation. 401K's are automatically deducted from your paycheck based on your contribution amount. If you don't have a 401K setup already I would highly encourage it as this will most likely be where the majority of your retirement income is invested.
Once your 401K is setup you need to choose a contribution percentage. Remember 401K plans use PRE-Tax dollars to invest with instead of post tax dollars. For example if you make $60,000 and contribute 10% your income you will be contributing $6,000 annually. Personally I think 10% is a great starting contribution percentage and encourage you to see how high you can go as you will thank yourself in retirement. If you are unable to contribute 10% because of your financial situation start with the minimum investment amount that your employer matches. If not you will miss out on free money from your employer.
Once your contributions become regular see if you can increase your percentage annually. The same goes with a bonus or commission you receive in the future. Most people receive a promotion and increase their spending, leaving them exactly where they were financially before the promotion and pay increase. This usually means buying more "stuff", renting a bigger apartment, or spending more on luxury items. Instead if you get a raise keep your spending the exact same and use the remainder amount towards your financial goals. This could include increasing your 401K, saving towards a specific goal (house, vacation, etc.) or additional student loan or credit card payments.
Have you opened a Roth IRA? If you've been around me personally and ever talked finances there is a good chance I've brought it up. Hopefully at this point you're smarter than most people & have opened a ROTH IRA (or traditional). If not learn how to open a Roth IRA and all the benefits of one here.
There are usually two options to contribute to your IRA automatically:
Payroll Deduction: Most employers will do this but check with your HR or payroll department to verify. This will be the easiest way to contribute as it's AUTOMATIC and doesn't require any work on after setup. If your employer does do this simply give them the account number & percentage you want contributed. Then sync up with your investment or bank (I recommend Vanguard) to set up automatic investments.
Deduct – Contribute On Your Own: If you're unable to do a payroll deduction all you need to do is do a transfer from your checking and savings account to your IRA provider. After each paycheck is deposited log into your IRA providers website and initiate a transfer to the amount you've decided on. To make sure you don't forget add it as an event in your G-Calendar or iCalendar. This will ensure it is automated and you don't have to use willpower and accidentally go on an Amazon shopping spree.
How much should you invest to your IRA?
The annual contribution limit is $5,500 if you're under 50 and $6,500 after 50 years-old. If you wanted to max this out you would need to average $458 per month or $229 each pay period if paid bi-weekly. If you can't contribute that much don't worry about it. Invest anything, literally $25, $100, to get in the habit of contributing towards your retirement. Everything adds up and compound interest will make your contributions grow significantly more.
Who doesn't use automated bill-pay? Service providers make it easy to set this up with each individual account. This ensures you will never miss a bill and never worry about the consequences of missing one. Missing a payment can seriously hurt your credit score or put you in collections.
Here are a list of bills that are easy to automate:
- Credit Cards
- TV/Internet Provider
- Cell Phone
- Car Payment/insurance
Once you have everything setup it will be automatic and stress free on your end. Do you have any questions on automating? Feel free to contact me and I'll help with any questions.
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