How To Automate Your Personal Finances in 2010
One of the first things to realize about putting your personal finances in order is that it is rather easy. Once you learn how to do a few things like putting your checking and savings accounts on auto-pilot, you will be on your way to solving the “mystery” of becoming financially independent.
In this post, I am going to show you how to organize your personal finances by arranging a few things and putting them on auto-pilot.
But before we do that, I am going to assume that you want to bring order and control to this area of your life? One of the reasons I recommend doing these few things is that it will free up your time, eliminate stress and give you a sense of control in creating financial independence in your life.
Like anything you do, whether it’s in your current job or profession, there is a certain order and a process to doing things efficiently. For example, when you work out, you don’t just jump on the nearest machine; you warm up, stretch, go through a variety of exercises and cool down. I promise you that if you follow these very simple steps, you will improve your life. I can also say that if you don’t follow these steps or something similar, this area of your life will continue to seem like a mystery.
Step 1. Arrange For Your Bills to be Paid on the 1st of the Month
Most credit card, mortgage and other credit companies will work with you on this. Call and ask them that your billing date be set the first of the month. For simplicity, we’ll also assume that you are paid by your employer on the first of the month. If you are paid weekly, bi-weekly, etc., adjust the numbers for your personal situation.
Step 2 – Automatically, via salary deferral, Take Advantage of any Company 401(k) Match
Invest, up to the percentage, that your company 401(k) Plan matches your salary deferral. For example, if your company has a 5% match, you’d want to put at least 5% into your 401(k) Plan. This is money that is literally given to you and you “must” take advantage of. By the way, if you don’t have a 401(k) just skip this and go to step 3. (no biggie – we just don’t want to leave free money on the table.)
Step 3 – Roth IRA
The next thing you want to do is maximize your Roth IRA. The Roth IRA contribution limit for 2010 is $5000. This would work out to $417 per month. If you aren’t able to maximize the Roth, adjust and invest what you can.
Note: Before you ever see your money, it is going to be taken out and put into your 401(k) and/or Roth IRA. You can set up an auto-savings arrangement (for a Roth IRA) through any discount broker. Here is a link to Charles Schwab’s Roth IRA Account Application. Roth IRA Application By the way, I don’t have an account at Schwab and am not an affiliate for them.
Step 4 – The Remainder of Monthly Salary Goes to Your Free Checking Account
Once you’ve invested in your company 401(k) and/or maximized your Roth IRA (for the month) the remainder of your monthly salary should go into a “good” free checking account that allows for auto-bill pay. One of my personal favorites is the high-interest “rewards checking accounts” that pay 3%-5% interest. Last week, I posted about one of my favorite high interest checking accounts at Coulee Bank. You can read that post, here. Just be sure to check the bank’s financial rating through a place like Bauer Financial.
Step 5 – Allocate 3%-5% to Your Personal Savings Account
This amount is to cover things like your summer vacation, down-payment on a house, emergency fund for car expenses, etc. Don’t overlook the importance of this step just because you’ve already saved in your 401(k) and Roth IRA. Actively putting money into a savings account will help give you a feeling of control and something to look forward to.
Step 6 – Auto Bill Pay for Monthly Expenses
Once you have completed steps 1-5, which will happen automatically, you will need to initially set up auto-bill pay through your personal checking account. Remember that in Step 1 you arranged to have all your bills dated (due) for the first of the month. This is so that you can instruct your personal checking account to pay those bills paid once per month and be done with them. The money is already being deposited into your account. Even if you are paid twice per month, this should work out. This is for monthly expenses like: rent, mortgage, power,cable, gym membership, etc. By doing this at the same time every month and just after you are paid, you will be paying on time and avoiding costly overdrafts.
Step 7 - Funny Money Spending
Although this is the last step, it is a very important one and something that you should enjoy. The problem is that most people make this the first step and wonder why their financial life is a mess. Once you’ve done all the above, you really should go out and spend what is left on yourself. This could be an expensive dinner, books, concerts, weekend getaways, etc. Of course it’s a personal choice.
As I mentioned earlier if you take these very simple steps, you will lay the foundation for creating financial independence in your life and you will gain a great sense of control and peace. This is the perfect time of year to begin! Give it a try and let me know how it works out for you.
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