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How much time do you spend dealing with your finances each month? What if there was a way to cut back how much time you spend on your finances so you can focus more on the things you like doing? Good news: there is. I am going to share with you how to automate your finances in five easy steps, so you can spend less time on money and more time enjoying life.
What Does it Mean to Automate Your Finances?
Before I walk through the mechanics of automating your finances, I want to explain what it means to automate your finances.
Automating your finances means setting up a personal finance system to handle your money without much thought or input from you. You can automate saving, investing, bill payments, and more. This approach cuts down on how much time you spend thinking about money because it all just happens automatically.
Why Automate Your Finances?
There are three reasons why I think you should automate your finances.
The number one reason I think you should automate your finances is that the money you do not see is the money you do not spend.
If you automate money going towards your savings and investments, you are less likely to spend it.
Automating your finances gives you back time. The time you reclaim can be spent with family, friends, or just about anything else that’s important to you.
3. Saving Money
Have you ever forgotten to make a bill payment or perhaps miscalculated and overdrawn your checking account? Automating your finances can prevent these occurrences, saving you on late fees, overdraft fees, and more.
So, let’s dive into the five easy steps to automate your finances!
Step 1. Open the Right Accounts
Step one in automating your finances is to open the right accounts.
The very first account you need is a good old-fashioned checking account. Just about any checking account will do, so long as it’s one with no minimum balance or account fees. If you don’t already, you’ll want to set up a direct deposit of your paycheck into this checking account.
Second, you’ll need one or more savings accounts. Savings accounts will house money for your savings goals. Some people use just one savings account and then track the allocation of funds using a separate tracker (as I do with my budgeting app You Need a Budget). Others like to open up different savings accounts for each of their goals. Either approach works – do whichever fits best with how you manage your money. If you’re looking for some of the best savings rates, it’s worth checking out CIT Bank.
Next, consider opening a credit card that fits your spending habits (if you don’t already have a good one). For most people, a cashback card is an excellent place to start. You can see my recommendations for three credit cards for every wallet if you’re looking for more guidance. Of course, if you tend to overspend or carry a credit card balance, just replace my credit card automation suggestions with a debit card.
And finally, you’ll want to set up investment accounts that gel with your financial needs. For most, this is an employer-sponsored retirement plan (like a traditional or Roth 401(k)) or a traditional or Roth IRA.
Once you have these accounts set up, it’s time to start moving money between them.
Step 2. Pay Yourself First
Next, to start automating your finances, you’re going to want to pay yourself first. The best way to do this is to automate your savings (short-term goals) and investment contributions (long-term goals).
How do I Automate my Savings?
What you’ll want to do is set up automatic transfers from your checking accounts to your savings accounts.
Let’s say, for example, you get paid on the last business day of every month. You can go to your checking account where your paycheck is deposited and set up an automatic transfer to your savings account every month on the 3rd or 4th of the month (I like to give it a couple of days of buffer).
These transfers can help meet goals like funding an emergency fund, vacation, etc.
How do I Automate my Investment Contributions?
For your long-term goals, you can do something similar. For each of your investment accounts (401(k), IRA, etc.), you can set up an automatic deposit from your checking account at whatever interval you desire.
Then, you can set where you want these contributions invested (I’ll get to that in step four).
I recommend putting aside 20% of your income for retirement, if possible. If this money goes straight to your 401(k) before you get your paycheck, you’ll never miss the money because it’s gone before you see it.
Step 3. Set Up Automatic Payments for Bills & Expenses
Once you have paid yourself, you’ll want to automate the leftover money to pay your regular bills and expenses.
How Do You Automate A Bill Payment?
To automate your bill payments, I have a few strategies.
First, I put every possible expense I can on my credit cards. The reason is that I get some sort of reward for every purchase on my credit cards. I can receive anywhere from 1.5 – 5.0% off my purchases in the form of cashback, travel rewards, etc. Again, I do this because I pay my bill in full every month, but if you can’t, use a debit card instead. It doesn’t make sense to get 1.5% back only to pay 20% in interest on a balance you carry over.
Second, I want you to set up automatic payments with every purchase possible. So, line up your electric bill, cell phone bill, insurance bill, etc. so that they all get charged automatically to your credit card.
Third, some people elect to have their credit cards paid automatically on the due date. I do not do this. The reason is that the majority of my expenses hit my credit card, so I always like to eyeball my checking account balance to make sure it covers my credit card payment.
I tend to run a relatively low balance in my checking account (because most of my funds are at work in savings accounts and investments). That’s why I prefer to pay my credit cards manually (and put a reminder on my phone). However, if you are concerned about missing a due date, and you aren’t worried about overdrawing your checking account, setting up automatic credit card payments is fine.
Expenses that Can’t be Paid by Credit Card
The final step to automating your bills is to automate the payments you can’t put on a credit card. While I don’t have lots of expenses like this, the most common one for most people is rent or a mortgage payment. In these cases, just set up an automatic withdrawal from your checking account.
Usually, these types of payments are reasonably predictable (mortgage, utilities, etc.), so I don’t worry about having them automatically withdrawn from my checking account.
Should I Automate My Bills?
One common question is if you should automate your bills at all. I realize it makes some people nervous not to see every transaction that is taking place, but again, it saves time and helps you save.
As I said, there may be individual bills you don’t want to automate (for me, that’s my credit card payments), but I think the vast majority of bills can be safely automated.
As long as you know what is generally going in or out of your accounts, this strategy works extremely well once set up correctly.
Step 4. Automate Investments
Next, you may want to think about automating your investments.
If you’re thinking about your employer-sponsored retirement plan, this is very easy. You just have to allocate where your funds will go each month. See our guide for investing in your 401(k) for guidance.
For an IRA or other investment account, it can take a bit more work to set up the automation. If you want the most hands-off approach, use a robo-advisor. These services will automate your investing based on your risk tolerance and financial goals. I have written a few posts with recommendations about specific services that are worth checking out:
You can, of course, also set your investments yourself, but this takes a bit more work.
Step 5. Increase Savings & Investment Contributions over Time
Finally, the last step in automating your finances is to increase your savings and investment contributions over time. For example, if you get a raise, you can simply increase the amounts of automatic transfers to your savings or investment accounts.
By increasing your contributions over time, you’ll accelerate your path to meeting your financial goals.
Apps to Automate Finances
One question I get quite often is which apps I use to help automate my finances. Here are a few specific suggestions:
- Personal Capital: Comprehensive Financial Planning & Tracking Software
- You Need a Budget: The Best Budgeting Software Around
- Bank Apps: Automatic Transfers Using Checking/Savings Account from Bank
- M1 Finance: My Favorite Automated Investing Service
- Truebill: Ensuring I Always Get the Best Rates on Services like Cable, Internet, etc.
How to Automate Your Finances: A Summary
Learning how to automate your finances doesn’t have to be complicated. It is mostly just about setting up automatic transfers and payments. As a recap, here are the steps to take to automate your finances:
1. Open the Right Accounts
2. Pay Yourself First
3. Set Up Automatic Payments for Bills & Expenses
4. Automate Investments
5. Increase Savings & Investments over Time
Want to learn more about automating your finances? The book I will Teach You to be Rich by Ramit Sethi offers a whole host of other tips!