Imagine an assembly line where all machine parts are automatically assembled into a final product. Every decision is pre-programmed such that all actions flow together to build machines like cars, electronics, etc. Automating not only works in industries to build a final product - it can also work in personal finance to build wealth. Your money is automatically transferred to the accounts you wish without you lifting a finger. Isn’t that amazing? That is what motivated me to automate my finances.

The Power of Automation

The main reason for automation in finances is to take willpower out of the equation. By automating your saving and investing, you aren’t continually relying on your limited willpower to set aside money every month. This can be one of the powerful things you can do to improve your financial well-being.

There are multiple books that talk about becoming wealthy by automating your finances. My personal favorites are –  “I Will Teach You to Be Rich” by Ramit Sethi and “The Automatic Millionaire” by David Bach. Here’s one powerful quote from one of these books:

“If you want to build wealth over your lifetime, the only sure way to do it is to get your plan on autopilot and make everything that’s financially important in your life automatic. You can set it up once in less than an hour and then go back to your life.”

– David Bach (The Automatic Millionaire)

After coming across the power of automation in finances, I thought it was a big life hack. Automation is simply running your paycheck like an assembly line. You get your salary and the bulk of what you get is automatically transferred to multiple accounts. It takes some time to set up initially, but once it is set up – it runs by itself.

For me, by automating finances, I have less time to think about money and more time to do things I love like reading, working out, listening to podcasts, writing, etc. The feeling that your finances are running like a machine and the fact that automation will take care of your money is just priceless. 

How I automated my finances?

Below are the five steps I have implemented to automate my finances. These steps are inspired by both the books I mentioned above. I also have a flow chart at the end of this article that summarizes my whole automation process.

Step-1: 401k Contribution (Retirement) – 10%

  • Before I even see my paycheck, I set up my 401(k) such that – a fixed percentage of my income is automatically transferred to my company’s 401(k). I usually do 10%.
  • If you’re working for an employer that offers a 401(k) match, enroll in the plan and contribute to the employer match. That’s free money and 100% return right there.
  • How I set it up: All I did was go to my employer’s 401(k) account (Fidelity, in my case) and set my contribution to 10%. That’s it. 

After the 401(k) deduction, the remainder of my paycheck is automatically deposited into my checking account. Here’s what happens next:

Step-2: Roth IRA Contribution (Retirement) – 5%

  • Roth IRA is a retirement vehicle that is taxed upfront but there is no tax on interest earned. That’s a deal!
  • I contribute a fixed amount to Roth IRA, usually 5% of my gross income. This transfer happens on the 1st of every month.
  • How I set it up:
    1. Since my 401(k) account is already with Fidelity, I went to its website and opened a new Roth IRA account.
    2. Connected my checking account.
    3. Set up the account to invest in FSTMX (Fidelity Total Stock Market Index). I invest only in index funds.
    4. Set up an automatic transfer to withdraw 5% on the 1st of every month and invest in FSTMX.

Now that my retirement investing is done, the next step is to pay myself.

Step-3: Emergency Fund (Personal) – 5%

  • After the Roth IRA contribution, part of my paycheck is automatically transferred to a high-interest savings account. 
  • I use an online savings account which is with a different bank than my checking account. 
  • Since this is for an emergency fund, I want to keep the money in a separate account so rainy day expenses.
  • I usually do 5% which happens on the 1st of every month.
  • How I set it up:
    1. Opened a new online savings account. I have a savings account with the bank ‘Ally’.
    2. Connected my checking account.
    3. Set up an automatic transfer to withdraw 5% on the 15th of every month.

Step-4: Personal Investing (Taxable) – 5%

  • This brokerage account is for a non-retirement account – investing account you can access before your retirement.
  • I contribute a fixed amount to a brokerage account, usually 10%. This happens on the 15th of every month.
  • How I set it up:
    1. Opened a new investing account – I prefer Vanguard which is known for index fund investing.
    2. Connected my checking account.
    3. My contribution goes into only one fund – VTSAX (Vanguard Total Stock Market Index Fund).
    4. Set up an automatic transfer to withdraw 5% on the 15th of every month and invest in VTSAX.

Step-5: Fixed Expenses and Credit Card Bills (Personal) – 50-75%

  • The rest of the money sitting in my checking account is used for:
    • paying off rent, car payment and electricity, and gas bills. All of these are paid automatically on the 1st of every month.
    • Paying off the credit cards in full every month which also happens on the 1st  of every month.
    • How I set it up:
      1. For rent, car payment and electricity, and gas bills, I went to their corresponding websites and signed up for automatic payments.
      2. Connected my checking account to all of them.
      3. Set up an automatic transfer to withdraw the balance outstanding from my checking account. All of these are paid automatically on the 1st of every month.
      4. I repeat the same with credit card accounts. 
      5. All my credit cards are set up in such a way that bills are due at the end of every month.

My Automation System Summary

StepAccountContribution %Transfer Date
1401(k)10%Bi-weekly
2Roth IRA5%1st of every month
3Emergency Fund5%15th of every month
4Personal Investing5%15th of every month
5Fixed Expenses and Credit Cards50-75%1st of every month

 

My Automation Flowchart

I’m a big fan of flowcharts – they help to condense lots of information into one single image. My whole automation system can be summarized into one single image:

 

Conclusion:

The key to compounding is consistency – which can be achieved by making your transfers automatic. Automation is powerful. It requires a few hours to set up the system, but we don’t have to invest any time later. Automating finances takes emotions out of the equation and focuses on the key aspects of building wealth – consistency and patience. It runs by itself like an automated machine. Take control of your finances by automating your money!

References:

  1. “I Will Teach You to Be Rich” by Ramit Sethi
  2. “The Automatic Millionaire” by David Bach