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I Run On Auto-Pilot

A key part of your financial success is automation. By having your finances on auto-pilot, it will take out the emotional, irrational, decisions one could make while investing. In addition, it will take the stress and time commitment out of your personal finances. This will allow you to stay on course regardless of your motivation and bring a lot of convenience to your everyday life.

The first step to this is to set up direct deposit with your employer. Most employers offer this as a default given its simplicity and efficiency. With your money automatically depositing in your checking account, you will be ready to automate the rest.

 

Automate your bills

Any recurring expense can be automated. This will ease your tracking and make it easier for you to cut down on costs. You might see that you have multiple monthly payments for similar product categories. For example, if you see that you are spending on Netflix, Hulu Plus, and Amazon Prime every month, you can slim down your entertainment budget by just choosing one.

The same can be analyzed for any spending category. I suggest you take the time to go down your list of bills and ask yourself if there is any way you could cut, replace, or reduce that bill. There are so many alternatives out there, I am sure you can lower the cost of just about any service (except maybe electricity but your usage could be reduced).

When you do reduce your expenses, you need to make sure to invest those savings. If you leave that extra money in your checking account, you will probably spend it on little (unnecessary) things without even noticing it. I suggest you keep an eye on your monthly spending with Personal Capital multiple times a month to stay on track. I pay all my monthly bills through my credit card for the rewards and easier tracking but the same automation can be achieved through your checking account if you wish.

 

Invest first, live off the rest

Setting up an automatic investment plan is the easiest way to avoid the emotional side of investing and is a great way to force yourself to save. You need to take out a percentage of your pay and automatically invest it, then live off whatever is left.

The first account your need automate is your 401k. Have money deducted from your paycheck and placed into your company’s retirement plan 401k to optimize the company match and tax advantages. This money is deducted pre-tax, which greatly increases the total growth of your savings.

Then you need to invest in any stock option plan that your employer might have but only if they offer a match. I, for example, get a 50¢ match for every dollar I invest so I am automatically up 50% on my investment from day one. Once you have maxed out those accounts, contribute into other tax-advantageous accounts then invest into taxable accounts if you still have extra capital.

Keep in mind that if you have high-interest debt (anything over 5% or 6%) you should pay off that first since you will get a guaranteed return of that said rate.

 

Below is the investment accounts you should prioritize, in order.

  1. Contribute to your company’s plan (401k, 403b) to get the full employer match (Free money and Tax advantageous)
  2. Participate in your employer’s stock option plan but only if they offer a match. (Free money)
  3. Pay off high-interest debt (Guaranteed high return of that said rate)
  4. Contribute to a Health Savings Account (HSA) if available
  5. Contribute the maximum to an IRA, traditional or Roth
  6. Contribute to the maximum limit of your work-based plan for tax advantages
  7. Contribute to taxable investing accounts

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For Canadians, it is a bit simpler

  1. Contribute the maximum to your RSP (Tax advantageous)
  2. Participate in your employer’s stock option plan but only if they offer a match. (Free money)
  3. Pay off high-interest debt (Guaranteed high return of that said rate)
  4. Contribute the maximum to your TFSA
  5. Contribute to taxable investing accounts

Emotional investing can cost you much more than you think and the best way to avoid this is to have everything on auto-pilot. The average investor will fall short of the market’s return simply because he thinks he can time the market or know more than anyone else about a particular stock. You might think you found the bottom of a market dip or you might sell too soon, thinking it was the top. Active trading is hard, even the mutual fund portfolio managers cannot beat the market net of fees, and you should not trade if you do not know what you are doing. To fully automate your investing, you can set up an purchase plan with your broker to buy mutual funds for free (TD e-series is the cheapest option) or you can buy ETF for free with Questrade.

By investing at every paycheck, you are effectively investing as soon as the money is available to you and maximizing your total return. Looking back in history, the markets have had much more growth periods than downtrends (about 7 to 1) so investing today is statistically better than holding on to your cash. On top of optimizing your investments, this strategy will get you used to live on less without necessarily decreasing your standard of living. I, for example, save and invest half my income and still live a plentiful, fulfilling, life. With those savings fully automated, I can relax and don’t ever need to watch over my investments. This forces me to constantly look for bargains, shop around, and live under my means in all aspects of my life.

In addition, this will save you from mood investing. Similar to a diet, you might be really motivated some days, or maybe for a few months, but your mood might affect your motivation. With automated savings, you can not choose to skip saving for a week because you just feel like spending or save less one payday because you are not in the mood that day.

I hope this will help you relax and spend less time thinking about your finances. Life is about happiness, maximize it! Xyz.

 

6 Comments

  1. I generally run my portfolios on auto pilot. I skew towards a buy and hold mentality, though I would sell at some point but largely ignore all the market noise and chatter. I reinvest my dividend automatically which allows for fast compounding and it’s all done for free and automated which is a great way to take some of the thinking out of investing.

  2. I try to keep as much automated as possible. It takes a lot of the stress out of my life if I don’t have to worry if the bills are getting paid or if I am investing in my respective accounts or not. Don’t give yourself the chance to screw up!

  3. automation really helps to take off stress and time-consuming tasks. I don’t even need to check my investments, they just go!

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