Personal Finance Guide: Automate Your Budget
No need to stop at the bank.
Today I want to teach you how to manage your personal finances by automating your financial accounts. The first thing you should do is have all your bills sent to you on the first of the month. Call up your credit card and ask them to switch your billing date to the first of the month.
Our Assumptions About Your Personal Finance
If you are not paid once a month-say you are paid every two weeks, or you are paid on the fifteenth of the month, you can adjust these numbers. But we are going to keep it simple and assume that your credit card bill arrives on the first of the month, and that you are paid on the first of the month.
With that out of the way, it is time to get started. I spend less than an hour a week managing my personal finances in terms of accounts. Here is your guide to make your financial habits more efficient:
Maximize Your Employer’s 401(k) Match
The first thing you are going to do with your paycheck, before the money even reaches you, is send enough to your 401(k) to maximize your employer’s 401(k) match. So, before you ever see your paycheck, your retirement savings will come out of your paycheck and go to your 401(k). You can usually set this up through your employer.
Your Checking Account
Your checking account will receive the remainder of the money. Your checking account is the central part of your personal finance infrastructure. So, it is very important that you get a great checking account. If possible, get a high yield Investor checking account.
A good checking account has no minimums, no tricks, no fees, and earns interest. You can use whatever bank you like, just make sure they offer a great checking account that matches your needs.
Roth IRA and Savings
All right, once you have set up a great checking account, and pointed your direct deposit to it, then you will set up automated mechanisms (that will depend on your bank) that transfers money to two different places. The first is your Roth IRA. You want to max out your Roth IRA if you are under the income limit. If you still have money you want to set aside for retirement left over, go back and send that to your 401(k).
Like I said before, always prioritize your 401(k) for the employer match (that is free money), and then deposit money to your Roth IRA.
The second place that you are going to transfer money is to your savings account. You should have sub-accounts in your savings account. For example, one for your wedding, one for your vacation, for your house down payment. There are a bunch of different ways to set those up.
The 100 dollars principle
How are you going to allocate the next 100 dollars you receive?
You want to send five dollars of that 100 dollars (5%), and maybe five dollars (5%) to your Roth IRA, five dollars to your various sub-savings accounts (5%). That is the bare minimum amount you want to save. I suggest you save at least 20%. If you can save 30%, you will be in an even better position down the road.
Automating Your Roth IRA and Savings
You can automate the savings transfer by logging in to your savings account and setting up an automatic transfer from checking to savings. Every bank has this functionality.
You can do the same thing for your Roth IRA. Log into your Roth IRA, connect your checking account, and follow the instructions to automate withdrawals from your checking account to your Roth IRA.
You have the remainder of your paycheck sitting in your checking account and you have withdrawn money to your various saving/retirement accounts. But you still have bills that you need to pay.
Paying Your Bills
You are going to pay off your credit card first. I have my credit card set up so that once a month it reaches into my checking account and pays itself in full. If I owe $1000, it withdrawals $1000. I know there's $1,000 in there because my paycheck arrives on the first of the month. It withdrawals straight from my checking account. I never have to pay overdraft fees because the money is there.
I know it seems like I am over emphasizing this but trust me. So many people pay off their credit card on some weird day in the middle of the month. They discover, once it is already too late, that they’ve gone out to bars a couple of times and bought a new TV and suddenly they don’t have the cash to pay off their card.
Pay your credit card bill on the same day every month. That is just good financial sense.
After you pay off your credit card, you will pay miscellaneous bills. These are bills where the recipient does not accept credit cards. Often, rent falls under this category. I do not send checks, ever, unless the circumstances force me to.
Use your bank’s bill pay service (all bank have this) that withdrawals money from your checking account at the beginning of the month, and issues a bill.
Remember, I know there is money in here, because I deposited my paycheck into my checking account just a few days ago. Bill pay issues an automatic check around the 26th of the month. They send the check to your landlord; you never have to touch it all. You receive an e-mail notification around the 26th that says your bank has sent your check. And your land lord receives the payment whenever it is due.
A couple of things you should keep in mind.
You should use your credit card to pay all standard bills. These include services like Amazon Prime, Netflix, or anything that costs the same every month.
Netflix costs $12 a month. Put it on your credit card, and never worry about it again. Go into Netflix settings, add your credit card and choose automatic billing.
Guilt Free Spending
Since you have already maxed out your 401(k), your Roth IRA, and you have a great savings plan to fuel your future investments, you are free to spend money. It is important to enjoy your money if you can.
When I go out and spend money, I don't ever feel guilty because I know that the rest of my personal finances are being taken care of. Guilt free spending is so, so sweet. You can spend money on a nice dinner for your date and not feel like you are hurting yourself because you have already handled everything important.
You are also going to have to withdrawal cash occasionally. I don't like using cash because I do not earn points on my credit card, and because it is kind of a pain, and hurts worse when it gets stolen, etc. I prefer to charge everything to my credit card, so I can easily track my finances. But you will need to withdrawal a bit of cash to have on hand. Set a specific amount you want to carry with you. Try $100 a month, or $100 every two weeks, or whatever suits your budget. That money will come straight from your checking account.
Note that I do not ever use a debit card. I don't like debit cards. I prefer to put everything on my credit card if possible.
Let me summarize what we have talked about so far:
Your company issues your paycheck. It deposits into your 401(k) and your checking account.
Your checking account pays your Roth IRA and your savings account, which you subdivide to suit your needs.
It pays your credit card (or rather, your credit card reaches into your checking account and pays itself once a month).
You use your checking account to pay fixed costs that don't take credit cards such as rent or other miscellaneous bills, and your occasional cash withdrawals.
You can spend guilt free.
Now you know how to automate your financial accounts.
Before you go, I want to talk about timing. Specifically, I want to give you the timeline in which all these things take place.
Your job pays you on the first of the month. Your credit card bill arrives on the same day. Remember: when your credit card bill arrives, you have about two weeks to pay it off. On the second of the month, your paycheck pays your 401(k), and then deposits into your checking account through direct deposit.
Some of the benefits of direct deposit:
Your bank may give you some free benefits for using it.
You do not have to go to a physical bank to make the deposit.
You want your money to earn interest right away.
It is not a good idea to have large checks like your paycheck sitting around.
If you are not sure how, ask your employer (specifically, the HR department) to set it up.
On the fifth of the month, your checking account should pay your savings account and your Roth IRA. I leave a few days is in case my check doesn't come through. If you have set up an automatic transfer where your Roth takes money out of your checking account, you could cost yourself an overdraft fee. Leave a few days so that you can verify that everything is good to go.
On the seventh of the month, pay off your credit card and any miscellaneous spending. Again, the reason I wait is that you want to make sure that all the cash is in your checking account, and everything else has been processed. That way when you pay your credit card off, you will make sure your checking account has enough money.
You should be getting notifications every few days that inform you on what is going on. You will not have to do anything yourself, except to make sure you're not overspending.
If you are not careful with your discretionary spending you might not have adequate funds to cover your bill. All your other bills should be consistent and easy to plan out. Be very cautious about your credit card spending.
Now you know how to easily manage your personal finances through automation!