Automate Your Way to Wealth

If you ask a personal finance guru for some tips on investing, one of the most common pieces of advice you will receive is “automation”. I am certainly not a personal finance guru, but I’ve read a lot of their books and articles, and automation is one of my favorite strategies.

I am a proponent of automating as much of your financial life as possible, from direct deposits, to auto-pay utility bills and recurring credit card payments. This strategy reduces stress and monthly workload, and it helps you avoid late payments and fees. It is also an important part of conscious lifestyle design.

What is another common piece of personal finance advice? Pay yourself first. The cool thing about these techniques is that you can combine them for greater efficiency and effectiveness. I find I learn best from examples, so I want to walk you through my automation process for paying myself first.

Step 1: Auto transfer to savings

The first thing I decided to automate, per the advice of Ramit Sethi, was my savings. Like he suggests, I have an online savings account at Ally. These accounts are great because they pay higher interest rates and it usually takes two or three days to withdraw your money. This feature makes you think twice about whether you want/need to spend it.

Every two weeks, after I get paid, I have a recurring transfer set up from my checking account to my Ally savings account. I don’t have to make any decisions or press any buttons. I spent ten minutes, one time, deciding how much I wanted to transfer and setting it up, and now it happens automatically every two weeks.

No excuses, no forgetting, just consistent, disciplined savings.

If you can set this up and stick with it for a year, take a SMALL percentage of what you saved and celebrate to reward yourself. Celebrating meaningful milestones is a great way to promote improvement.

Step 2: Auto transfer to your brokerage account

Next, I set up a recurring transfer from my Ally savings account to my Vanguard investment account. I like to use Vanguard because they don’t charge commissions for transactions on Vanguard (and many other) exchange traded funds (ETFs). This saves me about $7 for every transaction.

Like the savings transfer, every two weeks, my funds are automatically sent from Ally to Vanguard.

Step 3: Invest with a system

This is where the automation ends, but I have a system in place. Twice each month, after receiving the transfer into my Vanguard account, I log in and buy as many shares of a pre-selected ETF as the transfer will allow.

The only reason this step isn’t automated is because Vanguard doesn’t allow automatic ETF investing. You could buy shares at whatever interval works best for you – every two weeks, once a month, or quarterly. I choose to do it every two weeks to get the biggest benefit of dollar cost averaging.

If this sounds like an involved process, I promise it’s not. Getting everything set up, from beginning to end, should take you no more than a couple hours. Those will be two hours very well spent because this system could potentially serve you for the rest of your working life.

You can make little tweaks to it here and there if your income increases or decreases or if your other expenses change. But the beauty is, you never have to make any changes if you don’t want to, and it will force you to automatically save and invest – a practice you will thank yourself for later.

As a quick recap, here are the steps you should take to get your system in place:

  1. Assuming you already have a checking account, open a high yield online savings account. A simple Google search for “high yield online savings account” will give you several options. They are all pretty much the same.
  2. Open a brokerage account. As I said, I prefer Vanguard because of their commission free ETF trading, but there are numerous great platforms to choose from. Don’t let the choices overwhelm you – compare some fees and just pick one.
  3. Once your accounts are active, set up your automatic transfers. This process will be a little different depending on which bank and brokerage you use, but if you can’t figure it out, use the online help chat or give a quick call.
  4. Choose how you want to invest your money. I like ETFs because they are diversified, low cost, and are a great “set it and forget it” investment option. I’m not a financial advisor, so do your own homework, but important considerations when looking for an ETF are the expense ratio and what the ETF tracks. This is a good article on low cost ETFs that track Stock Indexes.

I also can’t end an article on personal finance and investing without recommending Ramit Sethi’s book, I Will Teach You to Be Rich. It may sound like a gimmicky title, but it’s packed with valuable information, and I use many of his techniques.

Good luck on your personal finance journey, and have fun automating your way to wealth!

Send me a tweet @josephcwells to let me know after you automate your saving and investing.

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