On this episode of the personal finance podcast, we're going to talk about how you can automate your finances and how you can treat yourself at the same time.
What is up everybody, and welcome to the personal finance podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today we're going to be talking about how to automate your finances. And conventional wisdom will say that motivation is the key to changing our habits. Maybe if you wanted it badly enough, you would make sure it gets done. But honestly, let's get real, because what we really want is the path of least resistance. We want to take the easier route and many productivity gurus will tell you that this is a dumb strategy, but what they fail to recognize is that it's actually a really smart strategy. Why? Because your energy and my energy is finite. And it's precious, we only have so much energy, and it's in our nature to conserve as much of our energy as we possibly can. This is the key to understanding. And this is why we all gravitate towards the path of least effort. So if you're deciding between two options, and one of those options reaps the same result, but as much easier, which do you think you're going to choose, you're always going to choose the easier option. We want to find the option that brings us the highest return with the least amount of effort, and every person on this planet is motivated to do what is easy. In other words, we want it easy like Sunday morning. The same goes with our money. Every action requires effort. The higher the effort you have to put out the lower the chances are you actually take action in each effort use on something that does not produce value creates an additional obstacle in your life. You're obviously capable of doing the hard things but the problem lies when your willpower becomes fatigued and it wears down. So you have to have a set plan in place. So that is where the system that I have put together to automate your finances come in. Because how do you combat this fatigue when it comes to money? What we do is we automate, then we automate some more, and then we automate again, because trying to force motivation when something is hard, is trying to stuff to pillows into a pillowcase. What a great analogy my brain comes up with here. It's gonna take a ton of effort, but you can probably do it. I've never heard of anybody stuffing two pillows in a pillowcase. But maybe you want to do it, I don't know. But nobody wants to burn this extra energy dealing with their money. It's boring. It's cumbersome, and it can cause burnout. It's hard to save more money. It's hard to keep investing. Automating reduces all this friction, it makes it easier for you to save and invest more. So imagine waking up every single day. Knowing your money is going exactly where it's supposed to go without you having to ever lift a finger. See that is the power of this system that I'm talking about. It's having your money on autopilot. These habits that we come up with, that we think that we can obtain are for suckers because you have to have a system in place to be able to achieve habits. The founder and creator of Dilbert Scott Adams actually says that he says habits are for suckers. And systems are for winners. And this is a proven system. It's something that you can use week in, week out. It's the exact system I use, and I spent less than an hour every single month working on my finances. So let me show you exactly how I do this. So the first step to automating your finances is that you have to set up direct deposit and this is something you're probably already doing. Most companies ask if you want to set up direct deposit when you apply, and most people take advantage of it because it's a great perk and a great benefit. It gets you started off on the right foot specifically for automating your finances. Because your money is directly deposited in your checking account, you don't even have to think about it. You don't have to wait to get your physical check, run it over to the bank and deposit it, it's just ready to go right away. And in our small company that we run, we have a couple of people who are still old school who like to get their checks, and we try to transfer them over a direct deposit as soon as possible. And once we do, they're always always so much happier, because it's just so much easier for us to be able to do that. And even small companies, if you work for a small company, usually they can set that up. QuickBooks and other other small accounting software's can do that. So nowadays, anybody should be able to set up direct deposit. The next step that you need to take is you need to auto invest in your 401k. Now if you don't know what a 401 K is, it's an employee sponsored retirement plan that most companies will offer. Now, if your company does not offer a 401k then you can look into opening up what is called an IRA and it does is pretty much the same thing. And a 401k is where you actually contribute money into your retirement account. And it goes in tax free, so you don't pay any taxes on the money you put in, and it's automatically taken out of your paycheck and put directly into your, your 401k. And then you can invest it in different different investment vehicles like index funds, or mutual funds or target date funds. There's all kinds of different variable investments that you can put in your 401 K. And that's the cool thing about it is that it comes directly out of your paycheck and you don't even have to think about it. Now, if your company offers a match, then you need to be taking advantage of that match. Now what is a match a lot of times companies will offer a percentage of how much you contribute, they will match it. So say for example, your company offers 3%, which is fairly standard for companies nowadays to offer three, four or 5% somewhere in that range, and your company offers a 3% match. So if you put in 3% of your income every single paycheck into your 401k, your company's going to give you 3% on top of that, that they're going to put into your investment, your 401k for your retirement.
So you need to be taking advantage of this match. Why do you need to be taking advantage of this match?
Well, let me see if I can find a rooftop to shout this from because it's free money. Do you like free money, because I love free money. And it's your company is literally giving you free money. And if you're not taking advantage of your 401k match, it's absolutely crazy not to do this, because you can double your money instantly, just by investing in your company's 401k and taking advantage of that match. It's actually a disservice to yourself if you do not take advantage of your 401k match. So all you have to do if you do not if you're not registered with your company's 401k is you just talk to your HR department. You don't have an HR department didn't just talk to your boss. And they'll set they'll get you all set up. And then you know, a lot of times the match and all those other parameters are inside your employees handbook. So that's where exactly where you look, the next step after you get your company's match in your 401k is to auto invest into a Roth IRA. Now, a Roth IRA is my preferred investment vehicle for retirement. The reason why is you're going to put your money into the Roth IRA, and it's going to get taxed. So it's actually taxed money. It's after tax money that you put into your Roth IRA, but your money grows tax free. And this is an amazing benefit for people who have a long time horizon. Because as that wealth grows, you could be you could be having, you know, well over a million dollars in your Roth IRA, and you're not going to get taxed on that money as it grows. And I'm we're actually coming up with an episode later on in this series, that we're going to be talking about how to become a Roth IRA millionaire, and I've talked about that on the blog a lot, but you can easily become a Roth Ira millionaire by just investing a couple hundred bucks a month and maxing out your Roth IRA. And the way we do this is with index funds, we invest in index funds. And every single year, that's the first thing we do, we max out my Roth IRA, we max out my wife's Roth IRA. And we go ahead and make sure that that gets done first, and that's our safety net. So each one should grow to over a million dollars. So we'll have a couple million dollars for retirement as our backup plan, and then we use these other investment vehicles. So that is a tremendous second step that you definitely want to take. You want to max that out before you max out your 401k because of some of those long term horizon benefits, and that your money grows tax free. The other piece about the Roth IRA is if you don't have one, you can open one at a brokerage. It doesn't have to be a company sponsored thing at all. So you know, one place I recommend is Vanguard, that's where I keep my Roth IRA and they have tremendous index funds there that you can go ahead and invest in like an S P 500 index fund or a total stock market index fund, what both of those are great, or you can check out in one finance as well. And that's a great automation tool for any brokerage account or savings account, anything like that, take a look at m one finance and if you go to Dollar After Dollar comm slash recommendations I talked about in one finance in there, you can go check that out. Now, the max out for your Roth IRA, as we're recording this podcast is $6,000. And so what that comes down and I kind of broke this down for people to make sure that they understood how much they need to take out per check automatically. So if you get paid bi weekly, which most people do, if you get 26 paychecks per year, or you get paid every other week, basically, then you need to take out $231 per check. If you get paid weekly, so that's 52 paychecks a year every single week you get a check, then you only need to take out $116 per check if you get paid twice a month. So if you get paid two times a month or 24 checks a year, they need $250 per check. If you get paid monthly, then obviously you need $500 per check if you get 12 paychecks a year. So that's just a quick breakdown. So you know how much you have to take out when you auto invest into your Roth IRA. So the first two steps, as you can see, we're auto investing right away, and it's automatically happening before we can even touch our money. It's a really cool strategy. Now, the third step is to automatically transfer to your savings accounts. Because your savings accounts are for big purchases that you're going to make coming up in addition to your emergency fund, and everybody needs to have some sort of emergency fund because guess what, emergencies are going to happen. It's not if they're going to happen, it's when they're going to happen, your car's gonna break down. your water heater is going to explode into the middle of your face while you're trying to take a shower. Your Your house is gonna have a new roof. There's all kinds of stuff that's going to happen to you and you have to be prepared in order to have a successful financial future. You have Be prepared, be prepared for these things to happen, you may lose your job, how are you going to live, so you need to be able to be prepared with an emergency fund. So that is why the third step is to automatically transfer into your savings account. Now you can get an online savings account with a little a nice little interest rate, you can have a money market account that has a little an even higher interest rate. All those are fantastic, you know, you get one 2% instead of your bank account, which gives you 0.5%. And then beyond that, you also want to transfer cash into the savings accounts in case you want to buy a down payment for a house or you want to buy a new car or any big purchase, you want to have some additional cash there. And that is extremely important. So as you can see these first three steps, you're paying yourself first, so we're taking care of you first. And then beyond that, then we're going to take care of our bills, expenses, liabilities, things like that. So make sure you always pay yourself first. That's why these go first because you don't want to spend this money before you're able to invest it, because that's not building wealth. And that's not a way to build a great financial future. You want to take this money out before you can touch it to buy your expensive bottles or your Yeezys or whatever crazy purchases you guys make out there. So the next step is to set up automatic payments for your bills. And the way I do this, is I put every single bill I possibly can on the credit card, and I put it specifically on a travel rewards credit card. The reason why I do this is because I want to accumulate as much travel rewards points as I possibly can. So if you put, you know my bills amount to a couple thousand dollars each month, and I put them all on this travel rewards credit card.
And you know, as these points accumulate, I'm able to pay for hotels with points, I'm able to travel with airlines for free and we've gone to Italy, we've gone to Greece, we've gone to Puerto Rico, we've gone you know all over The world for free with these travel rewards credit cards. So the way to set this up is to put all the bills that you possibly can on the travel rewards card and then pay them off weekly. And the reason why I pay off my cards weekly is not for anything to build a credit score or anything like that. I pay him off weekly so I know exactly where I am every single week. There's no magic to paying off your car weekly, I just like to do it. Now if you're more comfortable paying off bi weekly or you don't want to think about it or you want to pay it off monthly, no big deal as long as you're responsible with it and just ensure that you are paying attention to your bills on your credit card as time goes on there. So put all your bills on a credit card and then any bills that you can't put on a credit card, go ahead and pay for your checking account but set them up for automatic payments as well. So you can just monitor them and you don't have to manually go in there and remember to pay stuff you're going to have no late payments, you're going to have no late fees or anything like that. And another great perk to the to the credit card and having your bills on the credit card is it will alert you a lot of times When something looks off, so for example, I have the Capital One venture is what I'm using right now. And last month, my, my cable bill came in too high, and it was about $50. Higher it was double what it normally is. And Capital One said, Hey, this looks a little high. Are you sure this is how much you're supposed to be spending and it wasn't and I call up the cable company. And they say, Oh, we made a mistake we double billed you. And they went ahead and refunded me but I would have never seen that if I wasn't paying attention A and B if Capital One hadn't notified me, I probably would have glossed right over that. So that's another cool perk to putting your bills on those credit cards is see if you can find a card like the Capital One venture that goes ahead you know and it will alert you when purchase look look like they're out of line. Now the next step is to automatically track your spending. And what I mean by this is create like an automated budget and there's a couple of apps that I recommend. I've used all three of these, but the first one is meant and meant is buy into it which I think is now owned by Microsoft. And that's a cool app because you can just kind of plug in your bank accounts, it creates categories for you and will automatically transfer. Sometimes you have to manually manually adjust some stuff. But it's a great app just for getting started and going through the process. The second app that I use, and this is one I specifically use is why NAB and you can automatically set up the same systems with why NAB, but it is not free. It's a paid app. But you can do a lot more with it. There's a lot more systems and things that you can set up with why NAB that you cannot set up with mint. And then the third one, and one of my favorites. This is by far my favorite free app is personal capital. And I talk about it on that same page Dollar After Dollar calm slash recommendations. But personal capital is amazing. It has a really cool interface. And you can plug in all of your bank accounts and it'll automatically show your cash flow and where you're spending most of your money and show you exactly where your money is going. Because a lot of people will get lost when they start to automate all their finances and they have no idea where their money's going and they get to the end of the month. They're like where Did I spend all my money? Well, this is a great way to track that with through personal capital. So check that out as well. And then if you do not want to set a budget at all, that is why I set up the pay yourself first system at the front end of this automation. So that's why you're investing first, and then saving in your emergency funds and for your big purchases. Because then what you're doing is you're taking your savings off the top, and then the rest of it, you're just spending on expenses, or anything else your fun money or whatever else you want to do your treat yourself money. So that is why I set it up this way in order for you to be able to save and still be able to spend on all your other bills and things like that on the back end. And that's actually a budget. It's just a really, really simple budget, you're managing your money correctly, and you're making sure you're putting the right amounts in the right places. Now the last thing before we wrap this up, is you want to increase your automatic transfers when you get a raise. So what a lot of people do is they increase their lifestyle Every time you get a raise, and I believe you should do that, I believe you should be able to treat yourself every time you get a raise by buying fancier things or being able to buy the things you want. Because personal finance is very personal. And there's things that you want to do that I may not want to do. And there's things that I want to do that you may not want to do. But it doesn't matter. Because as you get those increases, just make sure you're also increasing your contributions to your investment accounts, and your cash savings. Because doing that will take you that much, you know one step further, and you're gonna be one step closer to retirement in order to be able to do exactly what you want to do with your money. because money is about creating freedom. It's not about restriction. It's not about tracking every single penny. It is about creating freedom to have the lifestyle that you want to have.
Thank you guys so much for listening. And if this is our first time meeting, consider subscribing so you never miss an episode. And hey, we're giving away a free one on one money coaching. session with me. All you have to do to enter is subscribe to this podcast and leave a rating or review on Apple podcasts, then send it over to Andrew at Dollar After dollar.com and you'll be instantly entered to win the one on one. One hour coaching session with me again, thank you guys so much for listening. We truly appreciate it. And we'll see you on the next episode. Have a great day.
Transcribed by https://otter.ai