Are your finances simple? Have you automated everything possible? Is there room for improvement?
Let’s discuss how to simplify and automate your finances to make them work for you.
One of the biggest issues I see people make is complicating their finances.
Your finances should be simple. You can always add complexity later.
Let’s take a lesson about simplicity from Steve Jobs. The founder of Apple was known for his outfit decisions. He wore the same outfit – black turtleneck, blue jeans, and New Balance sneakers – every day.
He wasted no time deciding what he would wear every day, which allowed him to focus on other important aspects of his life. The small choice to wear the same thing every day meant one less decision to make later in the day.
This is important because we all suffer from decision fatigue, where we have a finite number of decisions we can make in the day before our decision-making capacity is reduced.
Remember that time you bought a pizza for dinner when you said you would try something healthier?
That’s decision fatigue. You already used your energy in the day to make good decisions and by the end, you are tired and chose the easier option.
You want your finances to work for you in the same way.
While it may seem counterintuitive, your finances work best for you when they are automated.
How does this look in practice?
How to Simplify and Automate Your Finances: Automate Your Cash Flow
What happens when you are paid? How many decisions do you need to make? What if you eliminated all the decisions you need to make?
That’s what you should do, to the extent possible.
Now, sometimes I hear how if you automate, it feels out of control. It may feel that way to someone who has not automated their finances before, but once you start doing it, you actually feel more in control.
How does it work in practice?
Let’s assume for this example that you are paid monthly. Ideally, your paycheck is deposited to your account on the 31st of every month, and on the 1st of every month, every transaction automatically takes place.
In reality, that’s not always an option. We can discuss later how to adjust, but for now, let’s go with this scenario.
Your $4,000 paycheck is deposited on the 31st of the month. What happens next?
Your 401(k) retirement contribution was already made through your employer, which means your paycheck is net of your retirement savings. If not, set up another form of retirement savings and include it in the list below.
Taxes also were already withheld, so unless you selected the wrong withholding or have other income where you may owe additional tax, you don’t need to worry about setting aside money for taxes.
Then, you set up the following made-up transactions to automatically happen in your checking account on the 1st of the month:
- $1,500 is sent to your mortgage company or landlord for housing
- $200 is deposited into a sub-savings for your emergency fund
- $300 is paid to your car loan (even better if you can avoid a car payment and instead start setting money aside in a sub-savings to pay for your next car in cash)
- $250 is deposited into a sub-savings for your semi-annual or annual auto and life insurance payment
- $300 is paid to your student loans
- $450 is deposited into a sub-savings for your planned trip to Italy
The remaining $1,000 stays in your checking account for you to live off of for the month.
While these are hypothetical amounts and expense categories, it gives you a basic idea of what should be happening.
If you already know your expenses and goals, such as a trip to Italy, you know the amounts you need to set aside each month. By doing it on the first of the month, you can see what you have left to spend for the month.
This is important because if you do it the other way and try to save at the end of the month, it’s highly unlikely to happen. People tend to spend what is available. Remove the temptation.
The adage of “pay yourself first” exists for a reason – it works.
There are two ways to structure your bills:
- Line up together, such as at the beginning of the month
- Line up with your paycheck as much as possible
Line Up Your Bills
I personally like lining up bills together whenever possible. It’s nice to see every transaction take place near the same time. If I ever need to review transactions, they are easy to find and if for some reason I can’t automate a bill, it’s less mental energy remembering when it is due.
Since every person is not paid monthly, you may need to adjust your savings to happen twice a month. For the mid-month paycheck, consider what is due near the beginning of the month when most bills are due and save additional money during that paycheck.
Line Up Bills With Your Paycheck
The other option is to line up your income with expenses. With this method, try to structure your bills around when you are paid. For example, if you are paid monthly, try to have all due dates between the 1st and the 5th of the month. If you are paid twice a month, spread out the bills, so some are due near the 1st and others are due near the 15th.
By structuring it this way, you will feel like you never have excess money that can be spent. For example, if you are paid twice a month and all your bills are due on the 1st of the month, your paycheck near the 15th may feel like a lot of money and your paycheck on the 1st may feel like a small amount once the bills are paid.
With this structure, it may help to keep one to one and a half times your monthly expenses in your checking account. This way you don’t need to worry about the timing of your paycheck and expenses.
For example, if you spend $4,000 per month, keep an extra $4,000 – $6,000 in your checking account as a buffer. If you have an unexpected expense or a larger bill than normal, you’ll dip into this buffer without over drafting your checking account.
Whenever possible, automate your cash flow. Use bill pay, set up ACH transactions, and do automatic transfers. Avoid manually paying bills online, writing checks, and processing loan payments each month.
Not only will it save you time, but it will keep you on track with your goals. There will never be a question of, “Did I pay the bill?” or “Should I save that much this month?”. It will have already happened.
There are only two things I don’t automate in my financial life: credit card payments and charitable giving.
I don’t automate my credit card payment because I prefer paying it off throughout the month.
I don’t automate my charitable giving because I adjust the amounts and organizations a little each year. Though even with charitable giving, I could automate one donation each year because I don’t change it. See, even I am guilty of not automating everything even though I should.
Other than that, everything is automated, freeing up my time for other more enjoyable experiences.
Simplifying Your Accounts
Banking
Please, please, please simplify your banking structure. You likely don’t need two banks, let alone four.
More banks = more transactions = more complexity = more mental energy = more decision fatigue.
In an ideal world, your paycheck is deposited into your checking account and some money stays in the checking account while the remainder goes towards sub-savings or bills. That’s it.
There are exceptions. If you are above FDIC-insured limits ($250,000 per deposited per insured bank), then you may want more than one bank account; however, most people don’t need that much in cash. At that point, it may make sense to invest it.
I see people with 3+ banks frequently. They spend more time moving money between accounts, reporting interest during tax time, and it leaves more room for error.
I can make a case for having two banks: an online savings account that pays a higher rate of interest and a local credit union if you need to have services done in person. Otherwise, I would stick with one bank. More than that, you are adding unnecessary complexity.
I am guilty of not simplifying bank accounts. I have 3+ bank accounts and every time I think about them, I think how much easier it would be to simplify.
Then, I make excuses.
One is to transfer money to family members easily, another is to earn a higher rate of interest, and another is for free ATM withdrawals when traveling.
Simplify your banking structure. Make it easy on yourself to focus your energy on spending time with family, enjoying hobbies, or advancing your career. This side of personal finance is best when it’s easy and simple.
Investment Accounts
The other complexity I see is complicating investment accounts.
Like your banking structure, you likely don’t need more than two custodians. If your 401(k) is already at Charles Schwab and you are going to self-manage your assets, I would open other investment accounts with them instead of Fidelity. Or vice versa.
If you have old 401(k) plans from previous employers, consider rolling them into an IRA or your current company 401(k) plan. You’ll need to consider fees, available investment options, and other features before making the decision. It may make sense to leave them, but often, it’s better to simplify and consolidate.
The key is making an active decision to do something with them instead of accumulating numerous old 401(k) plans you forget about. It can be challenging to track them down later. Plus, if you are not monitoring them, you do not know your overall investment allocation or risk level.
You also don’t need a new, separate IRA for each old 401(k). For example, if you have four old 401(k) plans, you can open one IRA Rollover and roll all four 401(k)s into the one IRA. This is beneficial because you can manage all the money in one account instead of four.
Paying Your Bills
If you are still paying your bills by hand each month, please strongly consider setting up automatic payments. I am confident your time can be spent in better, more enjoyable ways.
I am a huge advocate for analyzing your bills to ensure you are still paying for things you use, but you can set calendar reminders to do that periodically.
Whether it is your credit card, electricity, or internet bill, you’ll save time each month. Let’s say it takes you 15 minutes each month to pay your bills. Over the course of a year, that is 180 minutes or 3 hours.
What could you do with an extra 3 hours per year?
I know it does not sound like much, but consider how many times per year you said you wish you had an extra hour in the day. That’s a movie or two, a nice dinner with a loved one, or anything else you love doing.
And, the best part is that it does not take long to set up, and once set up, it will work for you each month. You want your finances working for you – not against you. It should not be a drag on your time or mental energy each month.
Summary – Final Thoughts
As my old high school tennis coach used to say to us, “keep it simple, stupid.”
Essentially, everything should be as simple as possible. Continue simplifying until you cannot make it any simpler.
That’s how you should treat your finances. There is no reason you need to pay attention to your cash flow weekly. If you have a good grasp on what you spend, you can automate your savings when you are paid.
Then, you can handle your bills by putting them on autopilot. Each month, money comes into your checking account and it comes out shortly after without you lifting a finger.
It’s easiest to do this when you simplify the number of accounts. If you have four bank accounts now, work on consolidating to three. Or, if you are ready to take the plunge, try getting it down to one. Do the same for your investments. How few accounts can you have while still accomplishing your desired outcomes?
Your future self will thank you.