Hey everyone, I’ve got a special treat for you today. Kalen from the Money Mini Blog is going to be teaching us a little bit about automating your budget. So, without further ado, let’s get right to it!
“A budget is telling your money where to go instead of wondering where it went.” – Dave Ramsey
Having a budget allows you to control your money, instead of letting your money control you. You really are “telling your money where to go”, but you don’t always have to keep telling it where to go. You may already automate some of your finances, but you could be automating even more.
So, which parts of your budget can you set to automatic? Here are some options…
- Automate your investing
- Automate your saving
- Automate your giving
- Automate your spending
You can even become debt-free automatically! Now, let’s look at some specifics…
Automate Your Investing
Investing used to be all about discipline. Now that you can automate yourself into retirement, discipline is longer longer required. That really takes all the excuses out of not investing for retirement, doesn’t it? You can easily automate your investing, starting with these 3 steps. Set these items to automatically be invested each month:
- The amount your employer matches in your 401(k)
- The maximum amount you can contribute to your IRA
- The remaining amount you can contribute to your 401(k)
1. The amount your employer matches in your 401(k)
If your employer doesn’t offer a 401(k) or they don’t offer a match, skip this step and go straight to your IRA. If they do offer a match, contribute the maximum amount they will match (free money!), then move to step 2.
You can have 401(k) contributions automatically deducted from your paycheck, just be sure to check on your investments once or twice per year to make sure your portfolio is balanced. It’s usually not much of an issue, since most 401(k)s have very limited funds for investing.
2. The maximum amount you can contribute to your IRA
Determine whether a Roth IRA or a Traditional IRA is best for you, if you haven’t started one yet. If you have started one, you should still figure out which is best for you and switch if necessary. You should do your best to max out your IRA every year. If you can’t, just contribute as much as possible.
So how do you automate your IRA?
You simply have to use an automatic investment. Most mutual funds and index funds allow you to (or require you to) automatically invest a certain amount each month. Index funds are great tools for retirement investing.
Dividend Reinvestment Plans (DRIPs) are another great way to automate. DRIPs allow you to buy stock directly from a company , then continue to automatically reinvest your dividends. You can also setup a monthly contribution to buy shares in your DRIP as well. They are really great if you want to start small, since you can start with just one share if you like.
The great thing about an IRA is that you have so many more options than a company retirement account.
3. The remaining amount you can contribute to your 401(k)
Once you are able to fund you 401(k) up to the match and max out your IRA, you will want to continue sheltering your investments from taxes, so you can go back to your 401(k).
You can automatically contribute your remaining money for retirement to your 401(k) once you have maxed out your IRA.
If you are able to max your IRA and your 401(k), then you will have to look for other options to shelter your retirement money from Uncle Sam, but at that point, you probably have a pretty good idea of what to do.
Automate Your Saving
Are you building an emergency fund? Or saving for a big ticket item?
You can always schedule a transfer to a savings or a money market account.
Pretty much every bank is offering online banking these days. Of course, if you still use a bank that hasn’t figured out what the internet is, don’t worry! You can always go inside and set up an automatic transfer with a bank employee.
Just set the transfer to occur on the same day every month. This way you can keep track of it and know when it’s coming.
Automate Your Giving
If you give to a church, charity or organization, they may offer online payment with the option to automatically withdrawal a certain amount every month. If they don’t have that option, you can still set up a reoccurring transfer with your bank to automatically give every month.
You can usually transfer directly into their account, but if not, you can always setup an automatic payment to be physically mailed in the form of a check…remember those?
Once again, just make sure it comes out on the same day every month for tracking purposes.
Automate Your Spending
When you think about automating your finances, credit cards may come to mind. Credit cards are a great way to automate and consolidate your spending. Not only can you pay for your purchases with a credit card, but you can usually pay things like your insurance payment and sometimes even your utility bills with credit cards.
If you aren’t responsible enough to pay off your credit cards every month, don’t even attempt to do this, but if you can use them responsibly, you can consolidate your spending and schedule automatic payments on the cards...all while you are earning those great rewards! That’s why you signed up for the cards in the first place, right? Sure it is!
There are 2 very important points when automating your credit card payments:
- Stick to your budget
- Make sure the budgeted amount is in your account
You can setup an automatic payment plan to pay the balance in full on the same day every month. The keywords here are “in full”. You can set your credit card to pay either the minimum or the full balance. If you can’t pay the balance in full, you shouldn’t be automating your credit card payments and you really shouldn’t be using credit cards in the first place.
If you do have some credit card debt and other debt to pay down, why not automate that too?
Automate Your Debt Freedom
It’s like magic! You can set your debt to automatically disappear.
I know you aren’t paying the minimums on your debt, so be sure to include the extra amount you are paying when you automate your debt payments. If you are using the debt snowball or the debt avalanche, you will have to change the payments every time a debt is paid off and you will be surprised how quickly that happens!
The Downside of Automating
There can be a downside to automating your finances. Anytime you aren’t literally making the payments yourself, you can forget they exist. That’s not always bad, but it can get you into trouble if you’re not careful.
Sometimes it’s good to see the payments being made. It can be good to see your debt shrinking.
There may be a few negatives to automating, but pretty much all of them can be countered by monitoring your finances.
I’m not saying that you should automate every single dollar you spend. I’m simply giving you some insight into the possibilities when you begin to automate.
The most important part of automating your finances is monitoring them. Automating doesn’t mean you stop paying attention. In fact, you might as well use the time you save by automating to monitor your finances more closely. It’s nice to be able to sit back and watch your investments grow and your debt shrink.
Like anything, there are positives and negatives, but the more you automate, the more time you save. You can be spending that time on more productive things.
Maybe automating is for you. Maybe not. Either way, now you should have a pretty good idea of how to do it.