Nearly everything you need to do to achieve financial security is not interesting. Think about it; keeping track of your expenses is boring. Spending less than you make is tedious. Setting up a proper investment plan/discipline is boring. Setting up a proper retirement plan is boring. Everybody just wants to get on, make more money and spend it the way he or she likes. But making more money isn’t synonymous with being financially secure. The truth is you need to do all the boring stuff anyway to be truly financially secure. The good thing is that automating your finances could make the entire process of achieving financial security easier.
How Automating Your Finances Could Help Achieve Financial Security
Perhaps a good place to start is to understand what financial security means. In simple words, financial security is a state in which you’re not worried about your income being sufficient to cover your expenses1.
Automating at least three aspects of your finances — savings, investments and bills — could put you on the right track to achieving financial security. For one, automating these aspects gives you a shot at spending less than you earn since what automating these aspects means is that they’re first settled as your income comes in. That way, you know that you can only budget on the amount left after automation has settled your bills, savings and investments. If after automating your bills, savings and investments, you completely spend what’s left and need some more cash, you’d be pulling from your savings or investments with all awareness.
How to Automate Your Bills
The first step here is to conduct an audit of your bills to figure out how many recurrent monthly bills you have and potentially identify which bills you no longer need to pay — for instance, because you no longer use the service. You could organize this in an excel sheet along with the prices. You can get a list of all your monthly bills by looking through your statement of account. You should be looking out for items such as phone bills, electricity bills, loan repayment, insurance, etc. Once you enter your recurrent bills into an excel sheet, you’d want to open a new bank account for your bills.
Next, you’d want to set up a standing order on the account that receives your income to transfer the total amount of your monthly bills plus, say, a 10% cushion for variable expenses such as phone and electricity bills. For the bills that could be paid online, you’d want to update your accounts with the your “Bills” account details (debit card or account number, as the case might be). For offline bills, you’d want to speak with the merchants regarding setting up a standing order to settle the bills. Most merchants would have this option. By the time you’re done with this, you’d have automated your recurrent bills.
How to Automate Your Savings
To automate your savings, you should start by determining how much of your income you need to save. Housekeeping matters first, saving is different from investing2. Saving is essentially putting your money in a safe place or products where you can access it at any time. Savings accounts, checking accounts and certificate of deposit are examples of savings products. Savings products are usually insured, which is one of the reasons they’re considered secure. However, the tradeoff for the security that saving products offer is the low interest you receive.
Investing is simply taking an educated bet that the value of an asset will increase, which makes it relatively riskier than saving. The keyword here is “educated bet.” Investing in reliable investment products gives you the opportunity to grow your wealth at a faster pace than inflation rises while saving offers the security that you have some safe cash stashed away somewhere to cover for life’s happenings. There’s no rulebook that states how much of your income you should save. While many financial planners recommend saving between 10 and 15 percent of your income, how much you need to save boils down to how much you can really save consistently while maintaining a balance in your life3. That percentage could be up to 10 percent or more.
That said, to automate your saving, you’d need to open a second account, in addition to the “Bills” account, for your savings. Again, you’d need to set up a standing order on your income account to transfer the predetermined portion of your income into your “Savings” account. Since you do not want to spend this money on discretionary items, it’d help to make funds that come into this account harder to access. At the minimum, you wouldn’t want to have a debit card or bill payment features on this account. You can take things a step further by putting the funds that flow into this account into a certificate of deposit or a similar product local to you.
How to Automate Your Investing
You can probably tell by now that the process is similar to the first two steps. You’d need to create an account for your investments. Your investment account will be the account from which you make all your investments as well as the account that receives your investment proceeds. First, you’d need to conduct an audit of your investment accounts. Like in the case of paying your bills above, it’d help to use an excel sheet to list out every investment account you own as well as the value of each account.
Next, you’d want to reach out to the investment houses that hold your investments (either online or offline) to change your bank account information with them to your newly opened investment account.
offline) to change your bank account information with them to your newly opened investment account.
You’d also want to determine how much of your income you want to invest monthly. As in the case of savings, there’s no crystal ball that tells you what you’d need to save to build adequate wealth for the future. But a decent approach suggested by financial author David Bach is to invest the worth of the first hour of your daily pay4. Assuming you work eight hours a day and five days a week, an hour of your daily pay will be 12.5 percent of your income. With this plan, you’d want to set up a third standing order on your income account for the transfer of 12.5 percent of your monthly income into your investment account. It’s from this 12.5 percent that you’d make all your investments.
However, even if this helps you decide how much you can invest consistently, you still need to do your due diligence before you make any investment. The good old advice of speaking with your financial advisor still holds even in the digital world.
Once you complete these three steps, it would help to budget on what’s left in your income account to make sure you don’t have too many days left before the next payday when your money finishes. This way, you’d never be late on your bills anymore. You’d also be saving and investing for your future while living a decent life.