A key part of our financial success is automation. By having our finances on auto-pilot, it took out the emotional, irrational, decisions we could make while investing. Automating our finances took the stress and time commitment out of our personal finances. It allows us to stay on course regardless of our motivation and bring a lot of convenience to our 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
You can automate any recurring expense. 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. At first, I suggest you keep an eye on your monthly spending with Personal Capital multiple times a month to stay on track. Then, you can stop tracking so closely once you get the hang of it. 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. It is also a great way to force yourself to save. 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. Therefore, I am automatically up 50% 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.
Investment accounts you should prioritize, in order:
- Contribute to your company’s plan (401k, 403b) to get the full employer match (Free money and Tax advantageous)
- Participate in your employer’s stock option plan but only if they offer a match. (Free money)
- Pay off high-interest debt (Guaranteed high return of that said rate)
- Contribute to a Health Savings Account (HSA) if available
- Max out your IRA, traditional or Roth
- Contribute to the maximum limit of your work-based plan for tax advantages
- Invest any extras in a taxable investing accounts
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For Canadians, it is a bit simpler:
- Contribute the maximum to your RSP (Tax advantageous)
- Participate in your employer’s stock option plan but only if they offer a match. (Free money)
- Pay off high-interest debt (Guaranteed high return of that said rate)
- Max out your TFSA
- Contribute to taxable investing accounts
If all of this sounds too complicated, we suggest Wealthsimple.
Start your automatic investment account today!
Emotional investing can cost you much more than you think. 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.
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. If all of this sounds too complicated, our favorite investing platform on autopilot is Wealthsimple. They automate everything while still providing a human touch to financial planning.
By investing at every paycheck, you are effectively investing as soon as the money is available to you. You are therefore maximizing your total return by investing in a lump sum.
Looking back in history, the markets have had much more growth periods than downtrends (about 7 to 1). Therefore, 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 can still live a plentiful, fulfilling, life.
With my savings fully automated, I can relax and stop watching over my investments so much.
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 cannot 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. This forces me to stay on track with my goals.
I hope this will help you relax and spend less time thinking about your finances. Life is about happiness, maximize it! Xyz.