How to Automate Your Finances in 3 Steps - No BS Investing
Posted 85 views January 25, 2022, 20:51 - Dylan in Financial Planning

How to Automate Your Finances in 3 Steps

Whether you want to build up your savings or investments, it’s an excellent idea to automate your finances. Automation is a set-and-forget strategy for financial management. 

Your money goes directly into a financial account each month. You make progress with your financial goals without having to think about it! Here’s why automation is essential to personal finance and how to automate your own finances in three simple steps. 

Key Takeaways:

  • Automate your finances so you make consistent progress with your goals.
  • Make automatic monthly contributions to your emergency fund by determining how much you need to save, opening a savings account, and setting up direct deposits. 
  • Automate your monthly bill payments such as rent and utilities to never miss a payment.
  • Automatically contribute at least 10% of your paycheck to your 401K. Also, set up automatic contributions for other investments such as stocks. 

Why Should You Automate Your Finances?

Automate your finances, so you make consistent progress with your financial goals. In short, set payments or savings on autopilot. 

As humans, we like to think we’re rational. “Of course I’ll put money in a savings account each month,” you might think. “No need to automate.” But despite good intentions, we’re all irrational. 

Saving and investing are much more difficult if we do it manually. A paycheck is deposited into our bank account? We want to spend it immediately. 

In fact, 21% of Americans don’t save any of their annual income.

percentage of annual income saved

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Have money automatically taken from your paycheck and deposited into an account for savings or to pay off debt. For example, you might set automatic payments to a specific amount each month (e.g., $100) or choose to pay a statement balance. 

You never see the money and therefore can’t spend it. Your dollars are given a job so you can hit your financial goals. 

Step 1: Automate contributions to your emergency fund. 

An emergency fund is a stash of money (typically in a savings account) that covers 3-6 months’ worth of living expenses in case of a financial emergency (e.g., your car breaks down). Automating emergency fund contributions can help you easily build up this fund. 

Assuming that you have a regular source of income, here’s how to increase your emergency fund automatically:

OPEN AN ONLINE SAVINGS ACCOUNT 

You want to store your emergency fund savings in an account that’s easily accessible. At the same time, you don’t want the money too accessible (this could lead to you spending the money).

Avoid contributing funds to your checking account. Instead, open an online savings account. This might be with your current bank, but we recommend opening a separate account such as with an online bank. Ally Bank and Marcus by Goldman are two potential options as your money earns interest. 

Whatever option you choose, look for an account that offers zero monthly maintenance fees and low (or no) minimum balance requirements. 

DETERMINE HOW MUCH YOU NEED TO SAVE

Set a savings goal to know how much to contribute to your emergency fund every month. Although three to six months’ worth of living expenses is recommended, the actual number depends on your current situation. 

First, decide whether you need three months or six months’ worth of living expenses. If you have a stable job and don’t expect your situation to change, a three-month emergency fund should be fine. 

Next, add up your monthly living expenses, including housing, food, healthcare, transportation, personal expenses, and debt. Multiply the total by 3-6 months. Maybe you have $2,000 in monthly living expenses. $2,000 x 6 months = $12,000 emergency fund. 

Calculate how long it will take you to save this amount. If you have $1,500 leftover every month after living expenses and you can reasonably save $1,000 for your emergency fund, it will take you 12 months to save a $12,000 emergency fund.

SET UP A DIRECT DEPOSIT 

With your emergency fund number in mind, set up a direct deposit, so part of your paycheck goes directly into your savings account every month. This contribution should come out the day you get your paycheck. So if

The exact process to set up an automatic deposit depends on your bank or financial services provider. But typically, you need to ask your employer for a direct deposit form. Fill out info such as your routing and savings account number. Choose a monthly deposit amount (e.g. $1,000) to help you reach your emergency fund goal. 

According to CNN, only 39% of Americans could cover a $1,000 emergency. Automating your emergency fund puts you ahead of the game!

Step 2: Automate your bill payments. 

Ensure that your bills get paid on time, every time, by automating the payments. This way, you don’t get charged late payment fees or receive negative marks on your credit score.  

Here are the top bills to automate:

  • Mortgage or rent
  • Streaming subscriptions
  • Student loan payments
  • Cell phone bill
  • Utilities

You typically have two options to set up these automatic bill payments. The first option is to go directly through your bill provider or bank with bill pay. For example, if your rent for $950 is due on the 1st of every month, set up automatic bill payment with your rental company to monthly deduct this amount.  

The second option is to set up automatic payments with your credit card. But the problem with this option is that you can easily go into debt thanks to interest if you forget to pay off the balance every two to three days. 

One thing you can do is use your credit card to pay for recurring subscriptions automatically. This way, you increase your credit score, but the amount shouldn’t be too much to pay off consistently. You can still pay off the credit card balance every two to three days. Go through your bill providers to automatically pay for other bills. 

GET STARTED

We recommend making a list of all your monthly bills, due dates, and the average amount (Google Sheets is a great way to organize this information). Next, set up automatic payments with the right provider. 

Note what day each bill payment will be deducted from your account. Review these automatic deductions and your bank statement once or twice a month to be aware of any changes to your bills. 

Some bills you might not be able to automate. Set reminders in your calendar to pay these manually. 

Hint: Sign up for the Core Four of Personal Finance, including Recession Basics course on Udemy for a complete overview of personal finance. 

Step 3: Automate 401K deductions & investments. 

Automating your retirement and investments is one of the best ways to ensure long-term financial success! You automatically take advantage of time and compound interest to grow your money. 

If your employer offers a 401K match (aka matches a percentage of whatever you contribute), you’re leaving free money on the table. Combined with employer matching, consistent 401K contributions could make you a millionaire! 

Say that you are 25-years-old, and you make $50,000 a year. You want to retire at 65. 

  • You automatically contribute 15% of your salary to your 401K ($625 per month or $7,500 per year). 
  • Your employer matches up to 50% of your contributions. Six percent is the maximum employer match. 
  • Your current 401K balance is $1,000. 

Factoring in a 2% annual salary increase and 5% return, you’d have $ 1,776,868.32 in 40 years. Even without an employer match, you’d have over $1.2 million. 

[Source]

Set up automatic deductions, so money goes directly into your 401K. You should be able to talk to your payroll or HR department to set this up. We recommend two contribution options:

  • Max out your contributions. The 401K contribution limit is $20,500 in 2022.
  • Contribute the minimum to meet your employer’s match.

At the very least, contribute 10% of your salary every month into a 401K. 

If your employer doesn’t offer a 401K or you want to earn even more, you can also automatically invest a set amount in stocks or other investments each month (e.g., $200). Read more in our article: How to Build and Buy a Portfolio in 5 Steps

Automate Your Finances Today

Automating your finances might take some time on the front-end, but your efforts will be worth it. You’ll make consistent progress with your finances – both paying off debt and growing your money – and you won’t even have to think about it!

Want to learn more about personal finance and debt management? Take the Core Four of Personal Finance, including Recession Basics course on Udemy. This course teaches you how to effectively manage your money — even during tough economic times! Check out the course here.

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Elisabeth O. is an MBA graduate with a specialization in International Finance & Investments and over six years of financial writing experience. She is passionate about long-term investing to build wealth, avoids day trading and speculations, and loves a good Warren Buffet quote.