Automating your Financial Future and Security (Pay Yourself First!)

If you Google something like how to become wealthy, or how to build wealth through passive income, you are going to find articles and blogs that list off steps to becoming rich. I have read and scoured through many of these blogs and articles in search of a way to get rich without really trying. Sure, some of them tout up different ways that you can get extremely rich and others talk about how live an ultra frugal lifestyle is the best way to become wealthy. I disagree!

Many of us have the desire to have more money so that we may enjoy the many different pleasures that we can afford. As our wealth grows, so does our desire to use our money for our own enjoyment. We purchase luxury cars, we buy vacation homes on a lake front, we buy designer suits, we buy a big boat, and we take family vacations to Europe. What good is money to us if we can’t use it?! The truth is, it isn’t! Many frugal living blogs talk about how limiting consumption has been the most rewarding part of their lifestyle and that accumulating wealth has just allowed them to retire early and enjoy the free things in life. Of course, we can all thorough enjoy that kind of lifestyle but at some point there is normally something we find that costs money that we want. The point is that to keep ourselves sane while we budget and try to control our spending, we have to indulge ourselves a little bit. If giving up your $5 a day coffee and investing the money instead is your plan, but you really enjoy your morning coffee, find a way to do both! Perhaps, brewing your own coffee at home costs you only $1 a day, so you are still able to sock away $4 a day! Or maybe, you indulge only on Monday mornings when it is especially hard to drag yourself into work but skip it the rest of the week. Either way, you need to make sure that you aren’t giving up everything that you enjoy to chase the all-mighty dollar. Remember your sanity and your health are priceless and no amount of riches will make up for regretting how you lived your life. Of course, I am not advocating irrational spending either!

THE REAL SECRET TO BUILDING WEALTH- isn’t even a secret. It is the most boring piece of information or advice you will ever receive. JUST AUTOMATE IT. Yes I said it, just automate it. Put your savings and investing first. Track your spending and your income, create a budget and allocate a portion to savings and a portion to invest for your retirement. Then, make it automatic! Each pay period have your desired portion of income deducted and moved to chosen investments and savings. But, make sure that your deductions occur BEFORE you can see that money! If you never see it in your checking account you will never miss it!

Say for example that you take home $800 per week AFTER taxes and get paid each Wednesday morning:

– Have all $800 of your paycheck direct deposited into your checking account

– Then have your automatic transfer of $50 to your savings account occur that afternoon

– Have the brokerage firm that handles your IRA (individual retirement account) automatically be credited with $50 a week from your checking account on each Wednesday afternoon as well.

– then subtract the $300 each week to pay for your monthly fixed expenses

-the rest ($400) is what is left for discretionary expenses (or expenses that can be cut back on if necessary!)

This way, you can be sure that you will at least save your set amount each pay period since you will be forced to go without that money. It also helps to limit the amount you spend since the money available to you to be spent on discretionary expenses such as entertainment, is smaller than it otherwise would have been. The BONUS is, that if you happen to spend even less than what you allocated, you can save even MORE!

This strategy is by far the easiest and most efficient way to build wealth. Just by paying yourself first, you are forcing yourself to make decisions to save yourself money and setting aside a certain amount of money each pay period! If you like the idea of not having to think about saving and investing, take it another step further by investing in mutual funds and index funds!

While mutual funds generally have higher fees as they tend to be more actively managed, they can also be quite diversified and thus less risky then individual stocks. Index funds tend to be the least expensive investments and are passively managed as they are tied to a specific benchmark such as the S & P 500. By tying your investments into mutual funds or index funds you are reducing risk and avoiding the difficulty of having to pick out individual investments for yourself. Generally these two types of investments tend to involve the “buy-and-hold” strategy as they often gain value over time. So, plug your savings into these funds and kick back and wait as your money grows for you!

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2 thoughts on “Automating your Financial Future and Security (Pay Yourself First!)

  1. I agree with the concepts of paying yourself first and of automating your savings. The only addition I have to your great story is to max out your employer’s contribution to your 401k at work. That means, if your employer has a match on the first 5% of your 401k contribution, be sure to get all of that match. Where I work, we have a very generous dollar for dollar match that means I’ve doubled my investment just by contributing to the plan.

    Once you’ve don’t that, then turn to other investments as you’ve described. I am personally a fan of using index funds for younger investors.

    Like

    • I completely agree with you as well, Tim! Great point and something that I did not really touch base on. The 401(k) is definitely a great tool and especially those with a company match. I definitely would recommend contributing to your 401(k) at the maximum that is matched by your employer. This is free money that your employer provides to bolster your savings! Take advantage of this as much as possible!

      Like yourself, I also am a huge fan of index funds as the expense ratios are low and the risk is lower than trying to compile a portfolio of individual stocks.

      Thank you for your comment and read, Tim!

      Like

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