Here’s the exact system I use to spend just 90 minutes a month managing my money. If you haven’t set up your Conscious Spending Plan yet, I recommend doing that first.
CATEGORIES OF EXPENSES
Use these as guidelines for your spend and tweak as needed.
Fixed Expenses: Rent, utilities, debt, etc. 50/60% of net pay Investing: 401(k), Roth, IRA, etc. 10% Savings Goals: Vacations, gifts, down payment on house, cash for unexpected expenses, etc5-10% Debt Free Spending money: eating out, drinking, movies, clothes, shoes, etc.20-35%
Now let’s take your Conscious Spending Plan and make it automatic.
To do this, I use a concept called Next $100.
It simply means where does the next $100 you earn go? Does everything go to your investment account? Will you allocate 10 percent to your savings account?
Most people just shrug their shoulders and don’t take the time to think about how their money is being allocated – which means it’s being mindlessly spent and I’m sobbing uncontrollably.
But there is a better way! It involves actually applying the guidelines you set out in your conscious spending plan. If you did everything right when creating your Conscious Spending Plan, you already know how much money you need to contribute to your fixed expenses and how much is left for investments, savings, and expenses.
So if you made $100 and your plan is similar to the example above, you could invest $60 in your fixed expenses, $10 in your investment account, $10 in savings, and then you would spend the remaining $20 on whatever you feel like doing is. Pretty cool right? Well, it gets even better because once everything is automated, the money will be transferred from your checking account directly to the appropriate accounts without you having to think about it.
To see how it works, let’s take my friend Michelle as an example:
Michelle is paid once a month. Her employer automatically deducts 5 percent of her salary—an amount she determined after consulting with her human resources department—and puts it on her 401(k). The rest of Michelle’s paycheck goes into her checking account via direct deposit. (I’m not adding taxes here for simplicity, but you can control how much your employer withholds from each paycheck to pay taxes by speaking to your HR department.)
About a day later, her automatic cash flow starts transferring money from her checking account. Her Roth IRA retirement account collects 5 percent of her salary. (That combines with the 401(k) contribution to complete the 10 percent net reward for investments.)
One percent goes into a wedding under savings account, 2 percent goes into a house down payment under savings account, and 2 percent is earmarked for her emergency fund. (That takes care of their monthly savings goals, with a total of 5 percent of the take-home salary going to savings.)
I spend about an hour a month managing my money – paying bills, checking my credit card and bank account balances, and monitoring a few holdings in my portfolio (but I’m not an active trader just maintaining situational awareness) . Once a month I evaluate my savings plan to see if I can plan a vacation or make a major purchase.
— JENNIFER CHANG, 32
Your system will also automatically pay your fixed costs. She has set it up to automatically pay for most of her subscriptions and bills with her credit card. Some of her bills can’t be issued on credit cards—like utilities and loans—so they’re automatically paid from her checking account. Finally, her credit card company automatically emails her a copy of her bill for her to review for five minutes. After the check, the invoice is automatically paid in full from your checking account.
The money left in their account is used for guilt-free spending money. She knows that before she spends a dime of her debt-free money, she’s definitely already achieved her savings and investment goals — so she can really enjoy buying what she wants.
To make sure she doesn’t overspend, she focuses on two big wins: going out to eat and new clothes. She sets up alerts in You Need a Budget (YNAB) to notify her when she exceeds her spending goals and keeps a $500 reserve in her checking account just in case. (The few times she checked her expenses, she repaid herself with her “unexpected expenses” money from her savings account.) To make it easier to track expenses, she uses her credit card to do all of her fun things as often as possible pay possible. She knows from her spending trend that she typically spends $100 a month in cash on coffee and tips, so she includes that in her guilt-free spending. No tracking of receipts or manual entry of data.
In the middle of the month, Michelle’s calendar reminds her to check her financial software to make sure she’s keeping her pocket money within her limits. If she’s okay, she lives on. If she exceeds her limit, she decides what to reduce to stay on track throughout the month. Luckily, she has fifteen days to get it right, and by politely passing along an invite to dinner, she gets back on track.
A tool like You Need a Budget gives me a more detailed view of my finances. In YNAB, it’s super easy to tag money that’s available for discretionary spending and not needed for bills, and that really appeals to my analytical side.
—KYLE SLATTERY, 30
At the end of the month, she spent less than two hours monitoring her finances, but she’s invested 10 percent, saved 5 percent (in part buckets for her wedding, house down payment, and emergency fund), and paid all her bills the time she paid her credit card completely and spent exactly what she wanted to spend. She only had to say “no” once, and it wasn’t a big deal. In fact, none of that was.
COMMON INVISIBLE SCRIPT FOR AUTOMATION
When it comes to automation, it “sounds” really good – but almost none of us do it. Here’s why. Invisible ScriptWhat does it mean”It feels like I have more control knowing I can invest when the market goes down.”I can understand being nervous about automating my finances. The good news is that you are in control. You can always check it and stop or change any setting you want. More importantly, be honest: did you actually invest consistently every month? Is all your money getting where it’s supposed to go? Do you automatically rebalance? If the answer is no, you’ve lost money. Let’s fix this. “In the beginning I didn’t have much money. It doesn’t seem worth it.” Start now and build the habit. As your income increases, your habits will adjust and your system will automatically grow with you. “I invest manually based on my variable income. It’s hard to automate when my income can vary greatly.” Irregular income is dealt with in this automation system. “The honest answer is because I don’t know how.” Thank god someone is finally responding with a real answer, not some concocted bullshit about how they want “control” over their investments. We’re talking investment returns, folks! There’s nothing wrong with not knowing this stuff. Continue reading. “The fees are lower if I do it myself. I have more control over where my money goes (or at least it feels like it). It’s also a forced review of my goals and progress.” Sigh. feelings. Sometimes your feelings are fine-tuned instincts that you should listen to. But sometimes your feelings are capricious and misguided and mislead you – and you really should follow the evidence. This is one of those cases. Bottom Line: Automating your finances gives you more time, more money, and higher investment returns.