3 surprisingly simple steps to automate your finances
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Gone are the days of weekly trips to the bank. No longer must we stand in line for our turn to make our transaction, and then go about our day. Money’s gone digital and it’s never been easier to manage it.
The shift to digital means more than just getting to avoid the bank teller. It makes payments more secure by not relying on sending checks through the mail. It makes it more convenient, being able to transfer money with a few clicks. It takes out the excuse of, "I’ll do it later," by letting us automate everything. Plus, we can manage our money from anywhere thanks to mobile apps.Within just a few hours, it’s possible to set up a money management system and be on the path to financial success in the future. Below we’ll cover three simple ways to automate your finances and manage your money:
Once upon a time, we got monthly bills in the mail. We’d write checks, stick them in return envelopes, put stamps on them, and mail them back. The time between when our bills left our billers and our billers received our payments could take weeks. Because life was often too busy (or our bank accounts too lean), we often piled our bills on our kitchen counters to pay later. Unfortunately, later was often too late and we’d have late fees.
Today we can skip all this. The first step to skip all this is to create a "Bills" folder in your email account. Set up all your bills to be emailed to you rather than traditionally mailed to you. This will reduce the amount of paper used and the amount of paper on your kitchen counter.
Next, open two accounts that both have online access. Accounts at most banks, investment firms, and credit unions you’re familiar with can be opened and funded completely online. One of these accounts should be for your discretionary spending to cover dining out, going to the movies, and buying new clothes. The other account should be for your non-discretionary spending to cover less flexible expenses, such as mortgage or rent, electricity, and auto insurance.
Grab the most recent statements for all your bills. If you don’t have paper statements, online access to them is fine. Add your new account’s bill pay feature to your non-discretionary account and set up all your non-discretionary bills to be paid from this non-discretionary account. In most cases, you’ll need your biller’s name and your account number with the biller. Occasionally, you’ll need you biller’s address, but usually the bill pay system will have this information. When you’re setting up bill pay, set up all your non-discretionary bills to be automatically paid in line with their due dates and you’ll never miss a bill again.
Finally, set up two direct deposits from your employer:
Non-discretionary account - Direct deposit enough money into your non-discretionary account each month to cover all your monthly bills.
Discretionary account - Direct deposit the amount of your paycheck that you budget for your discretionary expenses. Add check writing and debit card features to cover your discretionary expenses.
If you’re paid monthly, like some contractors and freelancers, your monthly direct deposit into your non-discretionary account should equal the sum-total of all your monthly bills. If you’re paid twice a month, as many W-2 employees are, direct deposit enough into your non-discretionary account to cover your bills as they come due.
There are two issues to be aware of when setting up automatic bills pay. The first is that if you have more bills due during one-half of the month than the other half of the month. Make sure your non-discretionary account can cover the half of the month most of your bills are due. Most people’s rent or mortgage is due the first half of the month. If your car payment or any other larger bill is also due the first half of the month, you’ll see a lot of money leave your non-discretionary account the first half of the month.The other issue is that the amount due for some bills, such as phone and electricity bills, fluctuate from month-to-month.
For both issues, have a cushion of savings in your non-discretionary account. The goal with your non-discretionary account is to have enough savings to cover one months’ worth of your non-discretionary expenses. In the meantime, have at least enough savings in your account to cover the last half of the month, when the most bills are due.
Because you’re receiving bills by email and they’re being automatically paid by bill pay, it doesn’t mean you should forget about your bills. Make sure you understand all your charges on every bill. Make sure you’re charged correctly. Make sure your non-discretionary account is adequately funded from month-to-month.
Pro Tip: The old-school envelope system in which traditional envelopes stored cash for each spending category has gone digital. Mvelopes is a real-time budget app that tracks your bills, manages your budgets, and help you plan with digital envelopes all on your phone. As we’ve said before, Mvelopes is a solid resource for month-to-month budget management for people looking for help saving money and who are spreadsheet resistant.
Life isn’t just about working and paying bills, is it? You want to save for the future, save for big things, save for little things, and save for life’s surprises. That’s why, in addition to the accounts we already talked about, you should open a third account.
Set up a direct deposit from your employer to this third account but make sure it has no check writing, bill pay, or debit card features. Don’t connect this account to any other account for electronic funds transfers (EFT). This money should be hard, though not impossible, to access. You want to avoid the two steps forward, one step back progress many make with their savings goals.
For example, have an emergency savings account that covers between three to six months’ worth of your living expenses, or an amount equal to your non-discretionary spending during that time. That’s not an easy goal, but it’s important. The harder it is to access this money for a friends-cruise or a new TV, the less inclined you’ll be to use this money and the more inclined you’ll be to find this friends-cruise or TV money elsewhere.
Once you have your three to six months’ emergency savings, open a fourth account to cover all your other savings goals. It’s likely you have more than one savings goal and you don’t need a separate account for each savings goal. You do, however, want to avoid combining your emergency savings account with other financial goals. Cover your monthly expenses first and then save your three to six months’ emergency savings. Living paycheck to paycheck is a financial insecurity that affects many. The sooner you can avoid living paycheck to paycheck the more financially secure you’ll be.
Pro Tip: Chime Bank is an all-digital bank that rounds up every transaction to the nearest dollar and deposits this rounded up balance into your savings. Though it’s small, this savings quickly adds up from transaction to transaction. While apps such as Chime and its peers make it easier to save and invest, it’s important to be aware of all associated fees and use such services as appropriate for your financial goals.
The most daunting part of managing money for people daunted by managing money is investing. Investing doesn’t have to be hard or scary, though. In fact, it’s never been easier.
If your employer offers an employer-sponsored retirement plan, such as a 401(k), 403(b), SEP or SIMPLE IRA, contact your Human Resources department to open your account. It’s likely that your employer offers an annual match to contributions, up to a certain amount. Except for the fact that this match is part of your benefits, this is free money and you don’t want to miss out on "free money."
The contributions to employer-sponsored accounts are automatic and made with pre-tax dollars. Not only will your employer match a portion of your contributions into your employer-sponsored account, the IRS won’t tax you on your contributions into your employer-sponsored account. You’ll likely pay taxes on the money you withdraw from your employer-sponsored account in the future. If you wait to withdraw your money from this account until after you reach qualified retirement age (currently between 65 - 67) and you’ll likely be in a lower income tax bracket and, therefore, pay fewer taxes on this money.
If you want to invest outside of an employer-sponsored account, you can do so just as easily. At the bank or credit union where you open your discretionary and nondiscretionary accounts, open a Traditional or Roth IRA (Individual Retirement Account) or a taxable investing account. Click here to see if a Traditional or Roth IRA is right for you. Click here to learn more about 401(k)s and how they compare to IRAs.
Whether you open a Traditional IRA, Roth IRA, a taxable investment account or a combination of these, investing in these accounts can be automated. Once you open your account, as before, set up direct deposit through your employer into this account.
Save enough money in this account to either purchase a total stock market index fund or a combination of large cap, medium cap, and small cap index funds. A total stock market index fund is one fund that covers the entire U.S. stock market. If you save enough money or prefer, invest individually into a large-cap index fund, a medium-cap index fund, and a small-cap index fund. Index funds typically have lower management expenses because minimal management is required, as these types of funds simply track the markets.
Once you’ve purchased your one to three index mutual funds, use your monthly direct deposit to continue automatically investing in each of these funds through the Automatic Investing Program (AIP). Once you’ve made your initial purchase for each mutual fund, AIP invests smaller investments into each fund each month. The minimum initial purchase requirement and the minimum monthly AIP required can vary from firm to firm and fund to fund. In many cases, however, the minimum initial purchase requirement and the minimum monthly AIP are as little as $100.
Once you’ve set up your automatic investing, minimal involvement is required. Semi-annually, ensure your mutual funds are performing in line with the stock market and that your direct deposit and AIP are working.
As your mutual funds grow, you may wish to invest in more funds and some funds that try to beat the stock market. Once you’re covering your month-to-month bills, have your three to six months’ emergency savings, and have a foundation of retirement savings, feel comfortable considering other investments.
Pro Tip: Managing your bills, savings, and investments may still seem daunting even after you’ve automated everything. Personal Capital’s money management app lets you automate the oversight of your money management. Track all your bills and investments and get real-time updates on all your accounts with one app.
A few hours and a little strategic thinking lets you automate your entire financial life. With only a little attention here and there, you can automatically become financially secure for today and tomorrow. That’s why there’s never been a better time for managing your money. Take advantage of what’s available and you’ll be surprised how easy money management can be.
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