Here’s the exact system I use to spend only 90 minutes a month managing my money. If you haven’t already set up your Conscious Spending Plan, I recommend doing that first.
CATEGORIES OF SPENDING
Use these as guidelines for your spending and tweak as necessary.
Fixed Costs: Rent, Utilities, Debt, etc. 50/60% of take-home payInvestments: 401(k), Roth, IRA, etc. 10%Savings Goals: Vacations, gifts, house down payment, cash for unexpected expenses, etc5-10%Guilt-free spending money: Dining out, drinking, movies, clothes, shoes, etc.20-35%
Now let’s take your Conscious Spending Plan and make it automatic.
To do this, I use a concept called the Next $100.
This means, simply, where will the next $100 you make go? Will it all go to your investment account? Will you allocate 10 percent to your savings account?
Most people just shrug and don’t take any time to think about how their money will be allocated—which means it gets thoughtlessly spent and I sob uncontrollably.
But there’s a better way! It involves actually using the guidelines you established in your Conscious Spending Plan. If you did things right setting up your Conscious Spending Plan, you already know how much money you have to contribute to your fixed costs and how much is left over for investments, savings, and spending money.
So, if you made $100 and your plan resembled the example above, you might put $60 toward your fixed costs, $10 into your investment account, and $10 into savings, and then you’d spend the remaining $20 on whatever you felt like. Pretty cool, right? Well, it gets even better, because once everything is automated, that money will be shunted from your checking account right into the appropriate accounts without you even thinking about it.
To see how it works, let’s use my friend Michelle as an example:
Michelle gets paid once a month. Her employer automatically deducts 5 percent of her pay—an amount she set up by talking to her HR department— and puts it in her 401(k). The rest of Michelle’s paycheck goes to her checking account by direct deposit. (For simplicity, I’m not including taxes here, but you can control how much your employer withholds from each paycheck to pay taxes by speaking to your HR department.)
About a day later, her Automatic Money Flow begins transferring money out of her checking account. Her Roth IRA retirement account will pull 5 percent of her salary for itself. (That combines with the 401(k) contribution to complete the 10 percent of take-home pay for investing.)
One percent will go to a wedding sub-savings account, 2 percent to a house down-payment sub-savings account, and 2 percent is earmarked for her emergency fund. (That takes care of her monthly savings goals, with a total of 5 percent of take-home pay going into savings.)
I spend about an hour per month managing my money—paying bills, checking the balance on my credit card and my bank accounts, and watching a few holdings in my portfolio (but I’m not an active trader just maintaining situational awareness). Once a month, I might evaluate my savings plan to see if I can plan a vacation or make a larger purchase.
— JENNIFER CHANG, 32
Her system also automatically pays her fixed costs. She’s set it up so that most of her subscriptions and bills are automatically paid by her credit card. Some of her bills can’t be put on credit cards—for example, utilities and loans —so they’re automatically paid out of her checking account. Finally, her credit card company automatically emails her a copy of her bill for a 5-minute review. After she’s reviewed it, the bill is also automatically paid in full from her checking account.
The money that remains in her account is used for guilt-free spending money. She knows that no matter what, she’s already hit her savings and investing goals before she spends a cent of her guilt-free money—so she can truly enjoy buying what she wants.
To make sure she doesn’t overspend, she’s focused on two Big Wins: eating out and new clothes. She sets alerts in You Need a Budget (YNAB) to notify her if she goes over her spending goals, and she keeps a reserve of $500 in her checking account just in case. (The couple of times she went over her spending, she paid herself back using her “unexpected expenses” money from her savings account.) To track spending more easily, she uses her credit card to pay for all of her fun stuff as often as possible. She knows from her spending trend that she tends to spend $100 a month in cash on coffee and tips, so she includes that in her guilt-free spending. No tracking receipts or manually entering data.
In the middle of the month, Michelle’s calendar reminds her to check her financial software to make sure she’s within her limits for her spending money. If she’s doing fine, she gets on with her life. If she’s over her limit, she decides what she needs to cut back on to stay on track for the month. Luckily, she has fifteen days to get it right, and by politely passing on an invitation to eat out she gets back on track.
Using a tool like You Need a Budget gives me a more detailed view of my finances. In YNAB, it’s super easy to mark money that’s available for discretionary spending vs. needed for bills, and that really appeals to my analytical side.
—KYLE SLATTERY, 30
By the end of the month, she’s spent less than two hours monitoring her finances, yet she’s invested 10 percent, saved 5 percent (in sub-buckets for her wedding, house down payment, and emergency fund), paid all of her bills on time, paid off her credit card in full, and spent exactly what she wanted to spend. She had to say “no” only once, and it was no big deal. In fact, none of it was.
COMMON INVISIBLE SCRIPTS ON AUTOMATION
When it comes to automation, it “sounds” really good—yet almost none of us do it. Here’s why.
Invisible scriptWhat it means“It feels like I have more control when I know I can invest when the market is down.”I can understand being nervous about automating your finances. The good news is you’re in control. You can always check on it and stop or change any setting you want. More important, be honest: Have you actually invested consistently every month? Does all your money go where it should? Do you automatically rebalance? If the answer is no, you’ve lost money. Let’s fix that.“I only have a little money to start with. It doesn’t seem worth it.”Start now and build the habit. As your income increases, your habits will be aligned and your system will automatically grow with you.“I manually invest based on my variable income. It’s hard to automate when my income can vary widely.”Irregular income is handled in this automation system.“The honest answer is because I don’t know how.”Thank god, finally someone answers with a real answer, not some concocted bullshit about how they want “control” of their investments. We’re talking about investment returns, people! Nothing wrong with not knowing this stuff. Read on.“The fees are lower when I do it myself. I have more control of where my money is going (or, at least, it feels like it). It’s also a forced check-in on my goals and progress.”Sigh. Feelings. Sometimes your feelings are finely tuned instincts that you should listen to. But other times, your feelings are capricious and misguided and lead you astray—and you should really follow the evidence. This is one of those cases. Bottom line: Automating your finances will give you more time, more money, and higher investment returns.