Spending money is easy. Today’s consumers are bombarded with advertisements and opportunities to spend money at every turn. It easy to spend more money than you plan to, leaving you without money to save or to use to pay future needed expenses.
Personal finance is also a major source of stress for most Americans. A study conducted in 2016 indicated that 90% of Americans are worried about their personal or family finances.
Putting your finances on auto-pilot will help you plan for future expenses, save for long-term goals, and spend less time worrying about your money. These steps will help you automate your personal finances.
Consolidate Your Financial Accounts
One of the most stressful things about managing your money is simply keeping track of all your accounts. The average American with a credit card has more than 3 active credit cards at any one time. Many Americans also have savings or checking accounts at more than one bank. It’s especially easy to wind up with multiple bank accounts if you move since you might find your old bank doesn’t operate any branches in the area you moved to.
The more accounts that you have, the more likely you are to forget about the money you have in an account somewhere or a bill that’s coming due. That’s a recipe for wasted money.
If that bank offers investment services, you can move your brokerage accounts there as well. If you have a lot of credit cards that you don’t use, close the accounts, but be aware that this might impact your credit if you close some of your older accounts.
The goal is to have your money centralized at as few financial institutions as possible that way you can keep track of it all with little effort. Later on, it will also help automate savings towards your goals.
Stop Using Cash
Cash is convenient. You can count exactly how much you have in your wallet at any time, and it makes small or informal transactions quick. It's also very easy to lose track of how much you're spending when you use cash. On top of that, when you need more cash to make a purchase, you need to find an ATM and deal with any fees that the ATM might charge.
Instead of cash, use a debit or, preferably, credit card. You should always keep some cash on hand to handle situations like tipping the pizza delivery driver or buying something from a cash-only store, but putting all your purchases on a card brings multiple benefits.
The first is that it cuts out the need to use ATMs. Finding an ATM can sometimes be a hassle, and many ATMs charge a fee for the privilege of giving you your own money. In fact, Bank of America, JPMorgan Chase, and Wells Fargo combined to bring in $6.4 billion in ATM and overdraft fees in 2016. Making purchases on a card saves you the time it would take to find an ATM and the money you might spend on fees.
Another benefit is that paying with a card makes it easy to track your spending using an automated budgeting program. These programs automatically look at transactions on your credit and debit cards and categorize them. You can set the amount that you’re willing to spend in different categories. These programs will track your progress and notify you if you’re close to spending too much.
A third benefit is improved consumer protection on your purchases–for credit cards, in particular,
The final benefit is that many credit cards offer rewards for using them. If you spend $100 on a card that offers 2% cash back, you’ll get $2 back. In effect, you’ve spent $98 instead of $100. There’s no rewards scheme for paying with cash, so you’re passing up on free money by not using a card.
To complete the process of cutting cash out of your life, make sure you sign up for direct deposit of your paycheck. Instead of picking up a physical paycheck and depositing it every payday, the money will automatically appear in your bank, ready to be used.
Set Up Autopay for Everything
Once you've cut cash out of your life, you should set up autopay on as many of your bills as possible, including your credit card bills. The biggest risk of using a credit card is paying the bill late or failing to pay the bill in full. Both those situations will incur fees and interest, making you spend more money.
Autopay will automatically debit your checking account on the bill's due date. You can set the autopay to pull a specific amount, the minimum amount due, or the full balance. Ideally, you should set it to pay the full balance each month, so you never pay interest, but if you're dealing with a larger loan such as a mortgage or student loan, you might want to choose a specific number or to pay the minimum.
You can also set up autopay for your utility bills or rent, depending on what company provides those services. The fewer bills you have to actively think about paying, the less time you’ll spend managing your finances and the less stressed you’ll be.
Track Your Spending with Software
The most important part of a personal finance system is its budget. Without a budget, you have no way to plan what you’ll do with the money you bring in and no way to know how it all gets spent in the end.
Whenever you get a new job, a raise, or your income changes in any way, you should make a new budget. Your budget needs to account for how much money you take in, how much you spend on necessities, like housing and food, and how much you have left over.
The leftover amount is what you can allocate towards savings goals and luxury spending like shopping, vacations, and trips to fancy restaurants.
Creating a budget is relatively easy. Tracking your spending and following the budget is where things get difficult. Programs such as Mint and You Need A Budget help you automate your personal finances.
When you set up your account with a budgeting software platform, you'll enter the account information for your bank, investment accounts, credit cards, and loans. The software will automatically import the balance information so it can give you a breakdown of your finances and tell you your net worth.
Next, you’ll enter your budget details, telling the software how much you want to spend in different spending categories each month. Every time you make a purchase using your linked credit card, debit card, or bank account, the software will automatically find it and categorize it. It will then update your budget with how much you’ve spent in that category in the month.
If you get too close to the limit you’ve set for yourself, or if your spending habits change significantly, the software can be set to notify you. You can also check how well you're following the budget by logging into your budgeting software. Your budget screen shows how much you’ve spent, how much is left for the month, and data that indicates how much you should have spent so far based on the date.
You can make your budget as simple or as complicated as you’d like. You can set specific categories to roll the unused amount or the overage into the next month, letting you budget for larger expenses.
Being able to automatically track your spending makes it much easier to avoid spending more than you plan to.
Enroll in Your Work’s 401(k) or Other Retirement Program
Americans are not saving enough for retirement. One-third of Americans have not started saving at all, and the average 50-year old has only $60,000 saved for retirement. That’s enough to provide less than $2,500 per year in spending power using the well-known 4% rule for retirement spending.
You can avoid being part of those statistics by signing up for your employer’s 401(k) or another retirement plan. Each paycheck, the amount you specify will automatically be deducted from your paycheck and deposited in your retirement account.
To start, you have to make two decisions.
The first is how much you want to contribute. This can be a little more complicated than it might seem because 401(k) contributions are made pre-tax. So, every dollar you put in your 401(k) will reduce your net pay by less than one dollar. So, if your paycheck is normally $1,000 and you decide to contribute $250 per paycheck, your next paycheck might be for $800. That’s like getting an extra $50 per check, for free.
As a bonus, most employers incentivize saving for retirement by offering 401(k) matching. For example, your employer might offer a 100% match up to 3% of your salary. If you contribute at least 3% of your salary to your 401(k), your employer will contribute another 3% of your salary. In effect, you get a 3% raise, just for saving for the future.
The second decision is what you’d like to invest your 401(k)’s balance in. Stocks offer great prospects for long-term returns with the risk of significant drops in value in the short term. Bonds are more stable but offer less return in the long run. Your 401(k) will offer mutual funds that let you invest in a variety of stocks, bonds, or both at the same time. Some 401(k)s offer target-date funds that will automatically adjust the amount invested in stocks versus bonds as you get closer to retirement age.
Once you’ve set up your 401(k) contributions, you don’t have to think about it again. Your money will automatically get deposited in your 401(k) and invested in the funds you’ve selected. You can forget about it and just let it grow slowly over time.
Set Up Automatic Savings Plans for Your Goals
Once you’ve automated your retirement savings, you can automate your savings towards shorter-term goals like saving for a down payment, going on vacation, or buying a car.
Start by opening a new savings account for each goal you have. Use the bank that you already have accounts at, just to keep things simple. (We recommend using a Capital One 360 Savings® Account.) Then, figure out when you want to achieve your goal and figure out how much you’ll have to save each month to meet that goal. Assuming that you’re capable of saving that amount each month, you’re ready to get started.
Nearly every bank offers the ability to set up recurring transfers between accounts. Set up a transfer from your checking account to each savings account you've established for your goals. Each month, the amount you want to save will be automatically deposited into your goal account(s). By the time you reach the end of your saving period, the balance of the account will be enough to make the purchase you were planning on.
Because the transfers are automatic, you don’t have to actively think about saving. You also cannot accidentally spend the amount you were planning to save because the money will have been automatically debited from your checking account into your savings account.
This kind of personal finance system makes it far easier to achieve your goals.
Automate Your Investing
If you have enough money that you want to invest in taxable accounts, you can also automate your investing.
One way to automate your investing is to set up recurring transfers from your bank account to your brokerage and to set up a recurring buy order in your brokerage to put that money into a mutual fund or other investment.
If you want to truly automate your investing and be completely hands-off, you can use a robo-advisory service to handle your investing.
Robo-advisors invest your money for you, automatically handling buying, selling, asset allocation, and rebalancing. When you create an account with a robo-advisory service, it will ask you some questions to assess your goals and your risk tolerance. Based on your answers, the program will determine the proper mix of investments for your needs.
Once you’ve opened the account, all you need to do is send money to the robo-advisor when you have extra cash, and ask it to send money to your bank when you want to make a withdrawal. The program will handle buying investments, selling investments, and maintain the proper mix of investment types. All you have to do is let the balance build up over time, like an automated money making system.
Robo-advisors charge a fee for these services, generally a fraction of a percent of your total balance. Many robo-advisors claim that they pay for themselves by reducing the taxes that you owe and helping you earn a better return than you would on your own. Either way, robo+advisors certainly make investing easier, so they can be worth the expense if you’re looking to automate as much of your financial life as possible.