I hate to have to ask, but you are saving and investing aren’t you? If you are, more power to you! If you are not, today is the day to get started! An automatic saving and investing strategy is critical to building long term wealth.
Even with the best of intentions, you can still forget to put money away one month or forget to move some cash into your investment account. There are some great ways to automate this process and make the time investment a lot less painful now and you will be happy to reap the rewards later.
The most important rule to remember is to pay yourself before anything. The concept of paying yourself means putting money into your savings and investment accounts before you spend a penny. It’s good to set up your automation to happen a few days after you get paid. This allows your paycheck a few extra days to hit your account in case a holiday or accounting error causes a delay in your paycheck’s arrival. It also allows you to save and invest before spending any of your paycheck.
Why would I want to automate the process?
- Automation keeps you accountable and makes sure you never miss a single month
There are times when we get lazy, or we forget, or we decide to spend our money on those new shoes we have been eyeing for the last few months. Twenty years from now we will not care less about that pair of shoes, but we will care about the fact that our wealth is just a little bit larger because we made sure to invest on time every single month. Automating the process keeps us from allowing our human flaws to get the better of us.
- Automation saves you time, and time is money
Instead of spending your time on moving funds around and deciding where to invest it, if you automate the process you can spend that extra time every month on something that makes your more money. You can automate to the point that your time investment is 1-2 hours per month and you will probably be saving and investing more money than you are now.
- Automation takes one more task off of your plate
Now that you don’t have to spend much time every month thinking about your saving and investing, you can get back to doing whatever you love doing. Whether you want to spend more time with your family, your dog or your Xbox – now you have the time and you don’t have to feel guilty about indulging.
How can I automate my saving and investing?
It’s really not difficult at all. You will spend several hours upfront setting everything up, but you will end up saving a lot of time in the long run. More importantly, you will build wealth while you sleep.
Step 1 – Start with your savings
Before you spend a penny after getting your paycheck, you should transfer money to your savings account. You should have an account specifically for emergency cash funds. The general rule of thumb is to keep six months’ worth of living expenses in your emergency fund but this is really up to you and your level of risk aversion. If the money stays in your checking account, you may be tempted to spend it. Pay yourself first by investing in your wealth and then proceed to step 2.
Step 2 – Transfer money to your investment accounts
After transferring some money to your emergency cash reserve fund, you should send money to your investment accounts. First fully fund your 401k or IRA accounts and when they are maxed out for the year, proceed to send money to your traditional brokerage account. If your company is offering a 401k match, you should be maxing it out on every paycheck. You should then proceed to pay in as much more as you need to to hit the yearly maximum.
After fully funding your 401k for the year, calculate how much money you should be transferring every month to max out your IRA account. If you still have money left to invest, send the rest to your traditional brokerage account.
Many banks will allow you to set up automatic investing – this means that monthly, quarterly or semiannually your account will automatically take whatever funds are in it and invest them in the funds of your choosing. For example:
- You chose to automatically invest in the Vanguard 500 Index Fund (VFIAX)
- You set up an account with Vanguard or a no-fee broker, and configure it to automatically purchase however many shares of VFIAX your account can afford at the specified monthly, quarterly or semiannual time
Step 3 – Set all of your bills to autopay
Almost every major bank allows you to set up autopay options. There may be a few exceptions, but 90% or more of your monthly payments can be made automatically without you touching your bank account. Your phone bill, electric bill, credit card bill and car payment should all be automatic. Any other bill you can think of that allows for autopay should be set up to be handled without your interaction. This will make sure you never spend a penny on late fees, which can be quite hefty and hurt your saving and investing goals.
Step 4 – Spend whatever is left
You have done your due diligence. You have already paid yourself and taken care of all of your bills. Whatever is left is available for daily expenses and entertainment. Only spend what you have in this account, and no more. However, feel free to indulge a little bit! You have already taken care of your wealth and future and it won’t hurt you to live a little.
What day of the month should my automations occur?
To be honest, it doesn’t really matter. Some people like to organize it all in such a way that these important automations happen on the same day or within a few days of one another. As long as you have enough money in your accounts to handle all of your saving, investing and autopay automations you don’t necessarily need to time all of these according to a specific day of the month. If you do decide that it is easier for you to manage if they all happen around the same time each month, you will need to do a couple of things:
- Make sure your payments are all caught up
- Set up autopay for all of your credit cards and expenses and specify the date you want
- Some of these accounts take 30-60 days to establish the autopay cycles, especially if you had to change the autopay date
It is recommended that you take a look at your accounts a few times every month to make sure that everything is flowing properly and all of your automations are working properly. This is especially important in the first few months, because the automatic payments may not all kick in right away.
What banks make this process easiest?
- Charles Schwab for their no-fee online-only checking account
- Capital One 360 for their no-fee online-only savings account
If you followed all of the steps outlined in this article, you are well on your way to building personal wealth. Your wealth is building while you sleep, and you don’t have to spend much time on it. The most important principle to remember is to always pay yourself before paying your bills or spending any money. You can always cut back on spending if an unexpected expense comes up, but you can’t turn back the hands of time and put money into your investment accounts. You’re only going to see your wealth grow if you have money in the accounts and working for you. If the money never even makes it into the account, it can’t possibly grow – so pay yourself first!