You’re Never Too Old to Automate Your Finances. Here’s How to Do it!
The core principles behind automating your finances are not new. In fact, if your parents ever put their coins in little jars labelled “vacation,” “emergency,” and “savings,” you’ve seen the basics of financial automation at work.
I don’t remember my parents talking to us kids about money much – maybe this just wasn’t something that middle-class families talked about in the 1950s – but, I do remember them putting aside small amounts of money for their future needs.
Well, if like most boomers, you have been busy working, raising a family and saving for retirement, you may have missed a new wave of financial automation tools and concepts that your kids are embracing in record numbers.
Millennials are embracing lifestyle gurus like Tim Ferriss and Ramit Sethi and putting their financial future on autopilot. Of course, there are many young people who are struggling, but, many are also thriving.
Today, I want to talk about why it is so important that men and women over 50 automate their finances. Then, I’ll discuss how you can get started today.
Think it’s Too Late to Automate Your Finances? Think Again!
Since starting Sixty and Me, which has since grown into a community of 500,000 baby boomer women, I have had a chance to talk to plenty of older adults about their finances. I’m not judging here, but, here’s a summary of how most of us are managing our money.
“How do I manage my money? Well, I get paid at the end of the month. A little bit goes into my 401K. Whatever is left arrives in my bank account. I pay all of my bills and spend the rest.” Actually, since many of us don’t have 401K plans, this is a somewhat rosy representation!
If we are going to get the most from retirement, we need to do better!
At this point, you might be thinking, “Automation may be relevant for people in their 20s, but, I only have 14 years until retirement. Why should I care?” Great question! Actually, you should care for two reasons.
First, over 14 years, even a conservative investment portfolio, earning 5% a year, will double your money. Having talked to 100s of baby boomers who have already retired, I can promise you that there is a HUGE difference between $200,000 and $400,000 or $500,000 and $1,000,000.
Second, managing your money carefully in retirement is not an option. Learning to automate your finances now will help to smooth the transition to retirement. It will give you the tools and strategies you need to get more from the best years of your life.
So, that’s enough theory. Let’s start automating your finances.
Step 1: Review Your Monthly Spending
Before you actually start setting up automatic transfers from your checking account to your investment and savings accounts, it’s a good idea to get an idea of how much you are spending. This will help you to know how much you can allocate to each account. Besides, it’s a great way to find out where all of your money is going!
If you want a little help managing your spending, consider using one of the many personal finance apps that have hit the market of late. One of my favorites is Dollarbird. Not only does it connect to your bank, but, it also has the option to enter information manually. So, if you just don’t feel comfortable sharing your financial data with an app company, you can always type it in yourself.
Another spending tracking app – and the one that I personally use – is Mint. In addition to helping you to manage your spending, it also has the ability to connect to your credit score data. All-in-all, it’s a great app!
After you have looked at 2-3 months of data, write down any items that you think are not contributing to your happiness. Also, look for website, magazine, TV and other subscriptions that you may be paying even though you are no longer using them.
By now, you should have a pretty good understanding of what you are spending and, more importantly, what you can afford to save. The next step is setting up a basic automation strategy.
Step 2: Automating Your Basic Savings
I’m assuming that, by this point, you have already asked your employer to send money to your 401K. If not, I strongly suggest that you do this. At the very least, make sure that you take advantage of any matching policy that your company has in place. Your HR representative should have all of the details.
The next step is to automate all of your savings accounts and bills. There is no perfect way to do this, but, let me use my own strategy as an example.
Any money that I make from my businesses comes into my checking account at the beginning of the month. A few days later, my rent, utilities, health insurance and other essentials are payed directly via wire transfer.
After I left my corporate job, I made the decision to cancel my credit cards, but, if you still have these, you will want to set up an automatic deduction for this as well.
I also set up savings accounts for my taxes (since I am self-employed, this is extremely important), travel fund and clothing allowance.
Next, I make sure that a percentage of my monthly income goes into an investment account. Talk to your financial advisor about whether a traditional or Roth IRA makes sense for you or whether there is another investment strategy that you should consider. But, regardless of what you decide, automate the process!
One idea that I learned by reading “I Will Teach You to Be Rich,” by Ramit Sethi, is to set up a “guilt free spending account.”
Basically, this is an account that you can use to hold money for luxuries. At first, I thought that this would cause me to spend more, but, in reality, the opposite happened. Since I knew exactly how much I could spend on luxuries, I was more careful with every purchase. When the money was gone, I knew that I needed to wait until next month to buy whatever it was that I had my eye on.
The key here is to automate as much as possible that that your banking “rules” take care of your money. The only decisions that you need to make are whether to change your allocations and how to spend your “fun money.”
Step 3: Make Adjustments as Necessary
One of the reasons that people never get ahead financially is that their costs keep up with (or increase faster than) any increases in income that they receive. Automating your finances helps to solve this problem.
Whenever you receive a salary increase, you should proactively change the allocations that are going into your savings and investment accounts. If you don’t do this, you will just end up spending the extra money.
I can’t tell you how many times I have seen people go on a spending spree in the years after their kids leave the house. Instead of automating their finances, they buy that new car that they have always wanted and start taking a cruise every year. There’s nothing wrong with having a little fun, but, make sure that you are doing consciously.
Even if your income is static, it makes sense to do a short review of your finances once a month and a longer review once a quarter. This will help you to keep on top of things.
I hope that this short introduction to financial automation has been helpful. Now, let’s start a conversation!
Do you automate your finances? Which software or apps do you use to keep track of your money? Please join the conversation!