Considering how much I enjoy talking about personal finance, I prefer to spend as little time as possible managing my own. There are a few reasons for this.
Firstly, time spent managing my finances is time that could be spent doing other more productive things (like blogging!)
Also, the more time I spend on my finances, the more I find myself questioning how I’m doing it. This means that I ultimately either spend too much time sorting out my money, which is annoying, or I may not ultimately make a decision at all on how to allocate my finances due to analysis paralysis.
If I know that I only have to spend a few minutes per month on managing my finances, it’s easy to find the time. If it’s going to take longer, I may (read: will) procrastinate doing it. This can actually cost me more money in the end if I, say, miss a payment deadline or take longer to add to my investments, thus missing out on market gains.
Finally, the more hands-on involvement that’s needed to manage your finances, the more chances you have to make a mistake. We’ve all been a victim of human error, right?
(True story: I had to transfer some cash between accounts last month and thought I got a number wrong. Almost had a heart attack for a few moments but lesson learned: don’t do anything important after midnight.)
Fortunately, there’s a very straightforward solution to all this!
Automating your finances saves you time, money and effort. By following these simple steps to set up your accounts, you’ll SIGNIFICANTLY reduce the amount of time that you need to spend on your finances each month.
In I Will Teach You To Be Rich, Ramit Sethi states that automating your finances “will let you focus on the fun parts of life. No more worrying about whether you paid that bill or if you’re going to overdraft again.”
Most importantly, you’ll remove a significant number of the day-to-day decisions that can cost you money. Should you buy this item or should you save? How should you pay off your debt? What should you use to invest?
With all of those questions already answered each month, you’ll have more money in your pocket and more time for the important things – like earning more money!
Here’s exactly how to set it up.
(Note that this assumes that you’re paid monthly. If you’re paid more or less frequently than that, take a look at the last section below.)
Check out these related articles:
- The Definitive Guide To Getting Out Of Debt
- FAQs on Getting Out of Debt ASAP
- The One Principle That Will Guarantee Your Financial Future
- The Only Tip You Need to Reach Financial Freedom As Soon As Possible
1. Connect your accounts
Firstly, you’ll need to log in to each of your accounts and make sure that they’re set up to allow automatic transfers from one to the other, like so:
- Connect your paycheck to your 401(k)/whatever your country calls its employer’s pension account (if your employer offers one).
- Connect your checking account to your savings account.
- Connect your checking account to your investment account. This may be more than one if, for example, you exceed the income limits of a Roth IRA.
- Connect your credit card (if you use it to earn points) to your bills. If you have bills that can’t be paid with a credit card or if you don’t have one, link them to your checking account.
- Connect your checking account to your credit card.
Time: Five minutes.
2. Align the due dates of your bills
It can be tricky if, say, you’re paid on the 1st of the month, but your internet bill is due on the 7th, your credit card bill is due on the 13th, your phone bill is due on the 18th etc.
Instead, you should call each company and ask to change your billing date. I’d recommend making these to all be on or around the date that you’re paid each month.
You may have a weird month initially where you’re being billed for part months, but it will sort itself out within a month or so.
Time: About half an hour, depending on how many bills you have.
3. Set up your automatic transfers
While I fully acknowledge that setting this up isn’t the most exciting thing you could be doing, it will make your life a hell of a lot easier.
All you have to do is tell each of your accounts to automatically make transfers each month in accordance with the following dates.
Note that this assumes that you’re paid on the 1st of each month. If that’s not the case, simply adjust the dates to suit your own circumstances.
1st of the month
Get paid. Hooray!
2nd of the month
Automatically transfer a set amount to your 401(k). The rest of your salary should be in your checking account.
4th of the month
Automatically transfer a set amount to your savings account AND to your investment account, such as a Roth IRA.
Remember what we established in this article? To quote the great Warren Buffet: “Don’t save what is left after spending; spend what is left after saving.”
As such, you should set it up so that you’re transferring as much as you can at this point to your savings and investment accounts.
If you don’t already have an emergency fund with at least three months of expenses saved up, you should also use this step to at least start setting this up.
If this sounds a bit scary initially as you’re worried that you’ll run out of money, you can make it a lower amount in the first month. However, you should aim for at least 5% of your income going to your investments, although 10% is even better.
Then, when you see that you’ve easily survived the month, consider increasing it slightly in the next month. Then a little bit more. And a little bit more. And before you know it, your saving rate (or, as we prefer to call it around here, your personal profit margin) will be higher than ever.
Note that this step assumes that you have your debt under control. If you have outstanding debt that you’re trying to pay off, you could – and perhaps should – use this step to pay this off as much as possible.
See more at The Definitive Guide To Getting Out Of Debt for a step-by-step guide to paying off your debt that actually works.
You may also wish to see FAQs on Getting Out of Debt ASAP, particularly regarding whether you should, in fact, be paying off more than the minimum amount of your debt each month.
5th of the month
Automatically set all of your monthly bills that fluctuate (e.g. electricity, water, gas) to be paid “in full”. For those bills that are the same each month, such as student loans or mortgage repayments, set up the transfer to be for the required amount.
You should also set this up so that you get an email with the bill on the billing date each month so that you can quickly check that you’re being billed the expected amount.
I like to set this up to be paid by credit card so that I can earn reward points. If, however, you’d rather not use a credit card, then the same thing can be done from your checking account.
You also may have bills that can’t be paid through an account, such as something like rent which may need a check to be issued to your landlord. If so, your checking account should have a free feature that allows a check to automatically be issued the day that it’s due. Problem solved.
6th of the month
Automatically set your credit card to be paid in full. You should also make sure that you’re getting an email each month with your credit card bill so that you can keep an eye on whether the amount is correct.
(This is also a great way to keep an eye on your spending. I pay as much as possible of my every day expenses on my credit card, so I can quickly see each month if I’ve spent a bit more than expected on things like groceries or going out. This means that I can immediately adjust my spending habits to make sure that I’m not going over in future.)
If you have credit card debt that you’re still paying off so that you can’t pay the full amount in one month, set it up so that at least the monthly minimum is being paid. This means that you’ll avoid late fees.
7th of the month
Breathe. All of your bills were presumably issued on the first and thus would normally be due today. But it’s fine! You’ve paid them all off and so you’re free to spend the rest of the month doing much more productive things!
What to do if you’re paid every two weeks
You could simply split the payments in half but there’s a risk here that you’ll miss the due dates of the bills. As such, you could consider doing one of the following instead:
- Pay your bills using the salary received on the 1st and transfer to your savings using the salary received on the 15th; or
- Set your billing dates so that they’re relatively evenly split over the month. That is, ask half of the companies if their bill could be issued on the 1st and half to be issued on the 15th.
I’d personally recommend the second one. While it’s not as neat, it avoids the problem that could arise if the amount you’re paid every two weeks is close to the amount needed to pay off your bills.
This could be problematic as it may mean that you’ll struggle financially the first two weeks of each month, which makes it less likely that you’ll stick to this system.
Whichever one you choose, it’s important to make sure that you’re not missing any bill/debt repayments and that you have enough money to survive until the next paycheck.
And that’s it!
Congratulations! In a few short steps, you’ve automated your finances and ensured that you’re saving as much time and money as possible!
It’s also a great system for removing any stress about whether you can afford something. After all, you’ll know exactly how much you have to spend, as that will be the amount remaining in your checking account after all the transfers are done.
Make sure you revisit this every now and then to ensure that the amounts of your transfers are correct. This is particularly the case for the amount being transferred on the fourth of the month, as you may soon find that you’re able to save even more each month.
And as increasing your savings rate is critical to ensuring that you’re able to retire as early as possible, this only further shows how automating your finances is one of the best things you can do for reaching financial freedom!