Are you worried that you will never be able to get your finances under control? Don’t worry, you aren’t the only one! People always tell me, “I just don’t know everything that is going on financially.” Things have gotten tougher now that everything you buy is sold via subscription (Netflix, Clothes, Meals, etc.). A new toaster for $30? Why do that when you could pay $5 a month and upgrade to a brand-new toaster every year? All kidding aside, I could look at everyone’s situation and lay out a plan that will set them on a path to wealth, but they still must execute that plan. If I could only give one piece of advice to someone in this situation, it would be to automate anything you can!
It sounds like a painfully simple solution to a complex problem. However, the majority of people spend money that they have access to. According to various articles, about half of Americans live paycheck to paycheck. It’s natural to be at the store and say, “I have $200 in my bank account and I get paid Friday, I can afford this.” This is just one reason why automating your finances can make a big impact over the long term.
The tax system may be the greatest example of this. Can you imagine the outrage from people if they were required to write checks during every tax season? Average families would be writing $10,000 checks every April. Instead, the government takes a little bit out of every paycheck. You essentially build up a savings account each year of prepaid taxes that you can use to reduce the amount you owe when you file your taxes. In most cases, people pay in too much during the year and receive a refund. Do for yourself what the government does for taxes.
Here’s how to do it.
- Set up any monthly payments (bills and debt) on auto-draft from your bank account. Don’t be tempted to skip a credit card payment any months.
- If you struggle with savings – Set up a savings account at a different bank than your current accounts. Set up automatic transfers from your checking or from your paycheck. Start with a small amount and increase it every 3 months.
- If you struggle with debt – For those of you really struggling to pay off debt, set up additional payments for the same time each month. Make sure these payments are applied to the debt principal only and your debt will get paid off significantly faster.
- If you struggle with retirement – Log on to your 401k or other workplace retirement plan. Start with at least a 2% contribution per paycheck. If your company offers a 401k with a match, contribute the percent to maximize the match. Automatically increase your contributions every year by 1% if that option is available. Otherwise, log on each year and increase it by 1%. If you don’t have a workplace retirement, set up automatic deposits into an IRA the same way you would a savings account.
Not only will these things help you build wealth, they will also make your life less stressful. You won’t have to worry about how much you can put towards savings at the end of the month. It will happen automatically. My guess is that you won’t even notice a difference in your daily life. This isn’t a get rich quick scheme, but these are the things that average people can do to retire as millionaires. Try it out! I think you will be surprised how successful you can be.
Mike Zeiter, CPA/PFS