How to Automate Your Financial Life — Step by Step
Every month you receive your paycheck and go through the same process. By hand, you pay your bills and move your money around. It is a lot of work and more often than not you will forget to pay something. Nowadays, people are too busy even for small tasks like paying the bills. If you are always on a hurry, you must learn how to automate your financial life.
It is not necessary to hire an extra service, your bank will do fine.
Step 1 — Prepare a list of your expenses
This is first thing to do when you are trying to learn how to automate your financial life. Write down the regular bills (rent, electricity, water, food). Consider other expenses (entertainment, gym). The list should be as detailed as possible. Include those expenses that get billed directly to your credit card.
Include paying the credit card itself into the expenses. Are you giving money to a charity and forgot about it? This is money that should be on your list too. Go through the list in detail. One mistake will ruin the whole system.
Step 2 — Set Up your Account
If you have a formal job, you will receive your paycheck around the same time every month. Set up transfers that will happen on a specific date. Divide the money following the formula, 5% to your 401(k) plan and the remaining 95% will go to your checking account.
Divide the 95% too:
85%: Expenses, including those you pay with your credit card.
5%: Roth IRA. This is a retirement saving accounts that people set with their income post-taxes. Even if you have a 401(k) plan, you should also consider an IRA.
This set up will prevent mistakes and forgotten bills.
What About Day to Day Expenses?
Not all the money will go somewhere. The 85% for expenses also include the money you will use between paychecks. If after paying you do not have enough money, it is time to make some changes. Consider reducing your expenses to the minimum. Spend less, then consider increasing the amount that goes to the saving accounts.
Every cent serves a purpose. Understanding that is part of knowing how to automate your financial life.
Paying Your Debt
The previous set up does not consider debts. Include it in your plan as part of the expenses. Another option is to set a different 5% only for the debt. The sooner you are out of debt, the better. Once you know how to automate your financial life, paying a debt will not be a burden. Paying on time will become a habit.
I Got a Raise, Should I Change The Formula?
No, you should not. No matter the income, the distribution should remain the same. Why?
Let’s say you received $100. The formula distributes the money like this:
$5, 401(k) plan
$5, Roth IRA
Now, after a raise, your paycheck will come back for $200. The formula remains the same but now the numbers look like this:
$10, 401(k) plan
$10, Roth IRA
It is the same distribution but now more money is going to the saving account. Consider the expenses, by the end of the month there still is money in the account. Do not spend more, instead set money aside for an emergency fund. An emergency fund will come handy in case of necessity and you will not touch your savings.
Advantages of an Automated Financial Life
Learning how to automate your financial life has many advantages:
Do not leave any bill unpaid: Some utilities’ companies allow you to set up automate payments. This way you will not forget anything. Paying on time helps your credit record.
Save money: Every month, the money is taken away automatically. It goes to a saving account and there is no way to waste it. Not having the money at your disposal will make the saving process a lot easier.
Save time: Instead of sitting in front of your computer, all the bills get paid. If you have a hectic schedule, learn how to automate your financial life. Any extra time could use to rest or a hobby.
Relax: It is one thing off the list. Because it is automatic, you will relax knowing your finances are fine.
When Should I Set It Up?
As soon as possible and before the next paycheck. Knowing how to automate your financial life is a sign of a healthy financial behavior. It is easy to make an excuse and blame the bank. Find a tutorial or ask the bank for help. Ignorance should not be an excuse. How to automate your financial life is an easy process but only for motivated people.
People that do not have a 401(k) plan should save that money. Do not add the extra 5% to the expenses. The same happen if they do not qualify for a Roth IRA. All the money should go directly to the savings section.
Having more money to spend, will make you waste it. If it is not an emergency, any extra money should be saved. A different alternative is to invest that 5%. It is a common misconception that investments require high amounts. Investing $10 every month is better that not investing anything at all.