Too many people today live paycheck to paycheck and in fear they don’t have enough money to pay their bills. Worse yet, they aren’t sure if they’ll have enough saved for retirement or even next week! And what happens when a major disaster happens and they cannot afford to pay for it?
Take a second and consider what you would do if you had a $10,000 home or medical bill come up tomorrow?
Below I am going to outline the entire system my family has in place to ensure everything is paid and accounted for, all without any effort on our part. I enjoy this strategy because it allows us to keep each of our goals separate from each other and we will notice a breakdown in our budget much sooner.
Savings
One of the greatest things my family has ever done for our finances is taking every step we can to automate it. When our paychecks hit our bank account, before we even see the money, we have specific transfers set up to move this money as we see appropriate. A portion is moved to a checking account specifically for bills, another portion for emergency savings, another portion for retirement, and several other smaller transfers for other goals we have such as our child’s college fund.
Naturally this strategy requires a bank that will allow you to open new checking accounts without random fees. We use Ally since they offer a fairly competitive savings rate and have nearly no bank fees that most traditional brick and mortar banks have. Do your due diligence before picking a bank, but I imagine most online banks or even credit unions will be comparable.
If you do not have a budget in place, then I recommend starting one before deciding on your transfer amounts. I typically have a small amount more than necessary transferred per month for our bills and savings goals as a safeguard against unexpected increases in expenses.
Retirement
The best part about automatically setting up your retirement contributions is never having to worry if you are saving enough. If you do all the heavy lifting up front and make sure your transfers are enough, then you never have to worry again.
Of course, I would not tell anyone to go full autopilot when planning something as large as retirement, but it is nice to know you potentially could. As a live example, someone I worked with previously had a considerable five digit sum sitting in a retirement account invested in cash for several years before I saw his statement. I quickly helped him correct it, but I did us both a favor and did not calculate how much he missed out on.
The general rule of thumb for retirement savings is 15% of your pre-tax income, though more is always better if you can afford it. One major point to consider is that if your income increases dramatically over the course of your career but you only save 15% the entire time, you will not have enough. This is due to the wonderful phenomenon called life style inflation.
My recommendation is at a minimum split any increases in income between savings and personal 50/50. I personally allocate all but a cost of living adjustment to saving for retirement. This way my lifestyle does not inflate, but I also have the same spending power year after year.
The exact amount you need or choose is entirely up to you. If you want more specific information for determining the perfect amount of retirement savings for you, I wrote a more in-depth article on how much you need to retire at all income levels.
Other Goals
The beauty of this system is that it theoretically works for an unlimited number of goals. As long as your bank allows for multiple accounts with no fees, you can use this method.
For instance, we have a separate account for our loan payments. At the end of the month or quarter, any excess money in this account gets allocated to the highest interest loan we are currently paying. We can also move this excess money to our emergency savings if we have an emergency. This sort of hybrid system gives much more leniency than just increasing the monthly payment on our highest interest rate loan. In a perfect world, increasing the monthly payment will save us marginally more money, but in the real world bad things can happen.
Another good example is a house fund. When my wife and I were saving for our home we had a savings account specifically for purchasing a home together. Anytime we had excess cash in our emergency savings or any other account, we could sweep it into this house fund. Rather than have a regular transfer into this account, we could treat it as a catch-all for any transfers that were larger than necessary over time.
You could also have a car fund. If you currently have a car note and manage to pay it off, instead of just pocketing the payment and spending it however, why not put it into this fund? Now any time you have a major repair bill or eventually need to replace the entire vehicle, you will have money set aside specifically for it. This works better when you don’t overspend on a brand new vehicle, but that is another discussion entirely.
Why not just have all monthly expenses in one “bills” account? The problem with this I have learned is that you can fall into a false sense of security with excess cash in a single account. If you have many annual or quarterly bills broken out into monthly payments into this account, you will accumulate cash in this account to pay these. For instance, if your yearly home insurance payment is $2,400 then after ten months you will have $2,000 excess cash just from this one bill. It certainly appears to be you overpaying, but in two months you will remember why you had that cash at the worst possible time.
Spending Money
Of course where would we be if we did not have money to spend on entertainment? Having a specific account for nonjudgmental purchases for you and your significant other can help ease any tension you might have if one of you is a spender and the other is a saver. This does not have to be a crazy amount, but any money in this account is allowed to be spent as you please.
Another account we have set up is a vacation fund. We have a regular transfer going into this account specifically for travel. I have a bad habit of not wanting to spend money, so by doing this I am forcing myself to actually go enjoy time with my family outside of our house.
If you are incredibly disciplined you could perhaps split money out specifically for restaurants, coffee, and other random splurges. I have not taken this system out to that extreme, but if it works for you then why not? The goal here is to make your finances easier not harder.
Work Smarter Not Harder
The underlying theme with this system is to make my family’s financial planning easier. If this system could work for you then great! If you think something else would work better for you then by all means do it.
By making most of the financial decisions automatically with bank transfers, we can focus on other things that are more important to us.
