Why You Should Automate Your Finances
The number one thing you can do that will have the most impact on your savings is to automate. Anyone who has tried to lose weight, start exercising, or build any other habit knows how hard it is. You know what you’re supposed to do or what you want to do and maybe you even know the steps you want to take to get there, but actually making it happen is another problem entirely.
The same is true in personal finance. Most people know that you’re supposed to save. So why is it so hard to do? One reason, of course, is that some people simply don’t have enough money to even pay basic living expenses. That’s a problem for which we as a society need to decide to change on a political level. But the rest of us? Those who are are making enough to survive and still struggle to save money for the future or for random expenses? The problem is that good habits are notoriously hard to build.
It’s all too easy to simply forget to put your money into savings. Or maybe you remember, but you keep putting it off because the moment you remember is not a good time to do it. It’s not like you can stop in the middle of distance learning or cooking dinner to go transfer some money to your retirement account.
Additionally, it’s hard to know exactly how much to save and where to put it. Maybe the reason why you’re not saving is that you don’t even have the accounts set up and you don’t know where to start when it comes to figuring out which account type to use and how much to put in it. We all have so many things going on all the time that it feels like there’s just not time to sit down and figure it out.
The solution is to automate. When you make things automatic, you don’t have to think about them. You’re never going to remember that you should be saving for retirement on the way home from your child’s soccer game and then forget once you actually get home. No more lying in bed thinking about it. Imagine how nice it will feel to just have everything happen without you doing anything.
Make a plan
Obviously you can’t automate your savings if you don’t know where or how much to save. So your first step has to be making a plan. This does not need to be a complicated plan. In fact, when you’re just getting started, it’s better to make it simple and start small. Although you can certainly add more accounts or categories if you want or need them, most people can start with just two savings buckets: retirement and regular savings.
Retirement
The first step is to find out whether your employer offers a retirement savings plan, most commonly called a 401k, 403b, or 457 plan. If you have this option, the easiest thing to do is to tell your employer that you want a percentage of your paycheck to go into that plan.
If your employer does not offer a plan, don’t fret. You can still have your employer send a percentage of your paycheck to any retirement account. Just make sure you’re following the contribution rules. For example, in 2020 there is a limit of $6000 of Roth IRA contributions for the year, so you wouldn’t want to contribute more than that. Ideally, you should be saving 15% of your paycheck for retirement, but start with what you can and gradually increase the amount if 15% isn’t initially possible.
Once you automate the contribution to your retirement account, check with the account management company to see what options you have for automatic investing. Often, your contribution defaults to going into a cash account. If you want your contribution to grow over time, it needs to be invested. Investment companies offer a variety of options for automating the investment process according to your needs and risk tolerance. Whether you use a robo-advisor, human advisor, or your own system, don’t just leave it in cash.
Savings Accounts
Instead of getting your whole paycheck dumped in your checking account, you can ask your employer to deposit part of it into your savings account. An alternative would be to set an automatic transfer from your checking account to your savings account each month, but there’s a risk that you’ll spend too much and not have enough for the transfer.
Some people have multiple savings accounts or an account that allows you to put things in different buckets. Others just have one account for everything or use a budgeting app to subdivide their savings into different categories.
It doesn’t really matter which method you use as long as you automatically send money into your savings account to pay for unexpected expenses and your goals.
Other things you can automate:
Contributions to a 529 College Savings Plan
Loan or debt payments
Bills
Transfers between accounts
Saving for specific goals like a new home or a vacation
Contributions to an emergency fund
Why automate?
You don’t have to think about it.
You make sure to take care of yourself first.
There’s less money in your checking account to spend.
It tricks your brain into thinking you have less so you’re less likely to overspend.
With a little work up front you can be lazy!
You can feel confident about knowing you have money set aside for things.
You won’t wake up in the middle of the night and think, “oh crap! I forgot to pay my credit card bill.”
You’ll actually have savings.
You won’t worry about money so much.
You’ll be presently surprised at how much you can save over time.
Automating your finances is the most important thing you can do to set yourself up for success in the future. It may take some time and thought to set up, but in the long run you will spend far less time managing your system than you would doing everything manually each month.
Even a small amount automatically sent to your savings can make a difference. You’ll experience the magic of compounding interest, but more importantly, you’ll build a habit. Once you have the system in place, it is easy to increase the amount. Don’t be discouraged because you worry it won’t be enough. Everyone has to start somewhere.
If this feels overwhelming to figure out, ask me about how financial coaching can help you!
