But so is everyone else, including you! We humans are cognitive misers, meaning we constantly seek ways to save time and effort when interacting with the world. And building your personal wealth takes time and effort! That should make it hard for a lot of people…
But we’re now in the 21st century, and there are a lot of ways to cut down on the work required for wealth building.
Automating a process requires a little bit of up front work, and in return you’re rewarded with recurring returns that add up big over time.
You’ve probably automated things before; if you’ve ever subscribed to a newspaper or magazine, you automated your purchase. Same thing with emailed news or blog updates. And you can do the same with a lot of your personal finances…
Here are the best ways to automate your finances:
The biggest and most important step for automating and tracking your finances- signing up for mint.com. Mint is an online service that aggregates all your financial information (bank accounts, investment accounts, loans, credit cards, etc) and presents it in one place. It’s vital for achieve your goals, because you have to know where you are in order to get where you’re going.
Signing up for Mint is a bit of a process- you first have to have online access to all your financial accounts, and then you provide Mint the login information for those accounts. This is actually a good exercise because it forces you to find any old accounts out there and really dig into things. The payoff for many people, is that for the first time you’ll easily be able to see your complete net worth.
Mint is super safe and secure, using bank level encryption, so your information is safe. You can read more about their security on their website.
Besides showing your net worth, Mint has great features like showing trends over time (earnings, expenses, investment performance, etc). And you can set budgets, which helps you track categories of expenses. I advise enabling their alerts service. That will send you regular emails of your current balances and progress on meeting budgets and goals. This is the ultimate automation: you don’t even need to head to the website, they email you the important info!
Signing up for Mint is the first step in any wealth building journey, because you HAVE to be able to track your goal progress and systems.
2) Direct Deposit
This is having your paycheck from work automatically deposited into your checking account. A no-brainer that almost everyone already has enabled, but needs to be reinforced.
3) Retirement Savings
Most employers have some sort of tax-deferred retirement account plans. 401k, IRA, etc.. You know, the brochure you got on your first day that you may have tossed out along with the guidelines that instructed you to not fall asleep while on the job…
These retirement plans are one of the easiest and best ways to automate your savings. Once you enable them, it allows you to allocate a portion of your income pre-tax to a retirement investment account. This is a huge gift from Uncle Sam.
Let’s say you make $50,000/year and normally have to pay 25% taxes on the top portion of that. When you allocate some of that pre-tax to a retirement account, you avoid paying the taxes on that allocation and earn an instant return! If you allocated 10% of your salary to a 401k ($5,000 in this example), then you are instantly saving (earning) $1,250 in taxes ($5,000 * 25%). If you took that $5,000 in your paychecks over the year like normal, you’d only be getting $3,850 in your checking account, because you have to pay taxes of 25%.
So if you haven’t done so already, now’s the time to set your retirement account up with your employer (usually that means digging up an old email for your job or talking with your HR department). After you’ve gotten online access, it’s time to choose how much you want to be deducted from your paycheck and put into a retirement account.
A common rule of thumb recommends allocating 10% of your pretax income (the options should be in stated in terms of percentages). If 10% feels too high then you can choose something lower (maybe 6 or 8%, then increase it little by little each year). Once you’re finished, add the account to Mint so you can track your progress.
The great thing about doing this is that while initially you’ll probably feel the sting of having a lower paycheck hit your bank account, after a month or two you’ll adjust and not notice it as much. And a few months after that you won’t even notice that the cash isn’t in there. But you will notice your net worth line item on Mint increasing, since you’ll be experiencing those instant tax savings, and hopefully earning a return on your retirement savings as well by having them invested.
4) Automatic Bill Payment
We all have bills to pay: utilities, credit cards, phone bills, rent, loans, and more. The old way to pay these is to sit down and look at your paper bills every month, then write a check for the amount due and mail it to the company. The new way to pay these is to enable automatic bill payment for each bill. This requires linking a checking account to your account with the company you make the payments to; that can usually be done online. It initially takes a little more work than writing a single check, but after that you never have to write that check again because the amount owed is automatically deducted from your checking account.
This all saves you time, and prevents you from missing a payment (assuming you have enough money in your checking account to cover your expenses). Making on time payments is key to building and maintaining a good credit score. I haven’t missed a single bill payment in 2 years by using automatic payments. That’s helped me avoid fees AND boosted my credit score a lot. And not because I’m a super disciplined bill paying machine. It’s because I use a system of automatic payments to do it for me.
You should still review your bills each month to make sure that you aren’t being overcharged and to monitor your expenses. Mint.com will also help you review what you pay.
Tip: Set your automatic bill payment dates to be a day or two after your paycheck clears in your checking account each month. That way your earnings go right towards important expenses like bills and loan payments.
5) Personal Savings
Another way you can automate your savings and use a system to start building personal wealth fast: create a separate savings or investment account (or both!), and set up an automatic transfer of money there every month or pay cycle. The best way to do this is to have the transfer occur a day after your paycheck clears, so that the money never sits in your main bank account begging you to spend it. This is a perfect example of the personal finance principle called paying yourself first.
Pay Yourself First: Every 2 weeks or month you get paid from your job. Some of that money goes to the U.S. government in the form of taxes (paying the government first). Most people spend the rest of the money on expenses. Some go to things you have to pay (housing, basic food, bills, etc), but others are discretionary (you choose to spend the money, but you don’t have to). When you immediately spend your earnings on discretionary expenses, you are paying the recipient your money. Pay Yourself First is a philosophy that you should be paying some of your earnings to yourself (you deserve it, you worked hard for that money!). And you do that by saving money, maybe for retirement, a future purchase (like a home), an emergency fund. Then after you’ve paid yourself, you cab be comfortable spending the leftover money on discretionary expenses.
Setting up automatic transfers to a separate savings account, maybe a high yield savings account (search for one here), or an investment account with a discount brokerage like Fidelity or TD Ameritrade, is a great way to pay yourself first. And it removes the need to be disciplined with your savings- the process removes the money before you even “see” it in your checking account and feel you can spend it. Another key system to building net worth.