Unlock Your Paycheck's Potential: The Power of Automation

Seeing a large lump of money come into your account on pay day is a tremendous feeling.

For those living paycheck to paycheck it can be a momentous relief knowing you have the money to continue to pay your rent and other living expenses.

For others it's the excitement of having some money to play with:

• Buying clothes
• Eating out
• Grabbing drinks with friends

Left to our own devices that money can often be severely diminished or even gone before we can blink.

Treating yourself and spending money on things that you love is fine, in fact I'd encourage it! But unconscious, unplanned spending is recipe for living paycheck to paycheck for the rest of your life.

I want you to be able to spend money on the things that you love, that are important to you, and still be contributing more than enough to your investments and savings so that you can have the best of both worlds: Building your wealth AND living a happy full life right now.

This article will guide you through how to set up an automated system that takes the stress and decision-making out of managing your finances, and helps you build wealth effortlessly.

Putting Life On Hold Isn't an Option

There are those that will tell you to scrounge and save every penny you have to put towards your long-term investing and savings accounts.

They may even recommend you spend as many waking hours as possible working as you can, even working multiple jobs just to maximise the amount of money you can invest.

The reason being that the more you invest now, the faster it will grow and the sooner that you can live off those investments and effectively "retire".

Whilst I agree that investing as much as you can now will yield the biggest returns in the long run, if it comes at the total sacrifice of your happiness today then it's definitely not worth it.

You could work every day for 2 years in anticipation of that big payout decades down the line, and then be hit by a bus - wiping out that fantasy of a big payout and spending the rest of your days on the beach.

How crushing would that be? No pun-intended.

The power for creating a better future is contained in the present moment: You create a good future by creating a good present.
Eckhart Tolle, The Power of Now

Automating your finances allows you to enjoy the present moment without sacrificing your future goals. It's about finding balance, not extreme deprivation.

We cannot control the future directly, but we can take actions today that will shape our future. Take small, practical actions every day that will help build a future you want, but don't forget to also spend time doing what you love every day too.

My favourite financial advice comes from Ramit Sethi, who continuously preaches that we "live a rich life today, and a richer life tomorrow".

Defining Your Ideals: Aligning Goals with Automation

Before automating your finances, take time to envision your ideal future. Consider these questions:

• Where do you want to live?
• Who do you want to spend it with?
• What does your ideal day look like?
• What do you love doing?
• What do you spend money on?
• What do you love spending money on most?

Use these answers to estimate the resources you need to get there. Rough monthly costs are fine.

Understanding your goals allows you to prioritise spending and savings, which will make the process of automation more effective.

Automating Your Payday Routine

Now that you are clearer on what you want to achieve, you should also have an idea of what money you will need to get there.

This will likely involve a large amount of money that will allow you to reduce the amount of time you spend working, or totally stop working altogether.

To do this, you need to build wealth.

Building wealth is something everyone can do with the right habits. But it is extremely hard to do when you are spending frivolously.

That's where automating our finances comes in.

Every month when your salary is paid, if portions of that money are automatically siphoned off to the various places you want them to go (such as savings and investment accounts), before you have a chance to spend it, then you can start growing your wealth without even thinking about it!

We want to set it and forget it. This will help us overcome procrastination and take full advantage of these different accounts.

I learned this simple system from Ramit Sethi, who's book, I Will Teach You To Be Rich, talks about it in great detail.

The system is made up of the following main parts (though it can be tweaked based on your personal circumstances):

• Bank Account / Checking Account
• Credit Card Account
• Investing Account(s)
• Savings Account(s)

Your Financial Hub: The Checking Account

This is your main bank account, where your salary will be paid into, and that will be used to pay regular payments and direct debits that cannot be paid with a credit card. For example, rent, utility bills and the like cannot be paid with credit cards, so you will need to use your checking account for this.

As with any account, you want to make sure the fees for your bank account are minimised. With you checking account you can get many with absolutely zero fees. My own account has zero fees associated with it.

It is important to note that your checking account likely won't earn any interest either. However, this account acts more as a central hub of our finances, directing money to where it needs to go rather than where we will be storing large amounts of money.

It is important to leave a decent buffer of money in your savings account so that if there is any problems with your salary, or any sudden, unexpected expenses come up, that you aren't immediately in trouble. Ramit Sethi recommends leaving around $1,000 as a buffer. This can be £1,000 if you are in the UK.

If you don't have that much, prioritise saving for that buffer and for an emergency savings fund.

Optimising Spending: Credit Cards

Credit cards can be a great way to improve your credit score and to earn rewards such as cashback and airmiles. They also give you greater purchasing protections than a normal debit card.

We want to use a credit card to make as many payments as possible in order to maximise rewards such as cashback. I myself use a cashback credit card to make as many of my purchases as I can.

When using credit cards it is important to pay your balance off in full every month. Do not fall into the trap of paying anything less than the full balance, as you will go into credit card debt, which has some of the highest interest rates of any loans out there, and will completely wipeout any of the benefits that you have earned through cashback or other rewards.

Whatever credit card you sign up for, ensure you can set up a payment to be automatically taken from your checking account to pay off your credit card balance every month. This can usually be done in your credit card providers app or on their website.

Maximising Returns: Setting Up Your Investments

If you don't have an investing account then you should set one up now.

If you don't understand how investing works, or why it helps you to grow your money, start research terms such as compound interest and investing in index funds.

There are a few ways to invest, but prioritising ways to invest whilst maximising returns and minimising taxes (legally) should be your top priority.

When I first started investing, I did minimal research into fees and taxes, and as a result I had to pay a large portion of my earnings in taxes. This taught me the importance of doing your my own research and understanding the ins and outs of taxes and fees before setting up an account.

Don't make that mistake. Do your research.

The simplest and best ways that I have found to invest are:

• Pensions - this allows you to invest pre-tax income, allowing your money to grow faster. You will pay tax when you eventually withdraw it, but it will grow faster thanks to the additional funds that would otherwise be taxed. Additionally, many employers will offer to match your pension contributions up to a certain percentage of your income, usually in the range of 3-6%. For example, if you earn £100,000 per year and your employer offers you a 5% match, each year you will contribute 5% of your salary to your pension. That's £5,000. What's more, your employer will also contribute £5,000 - doubling your pension pot. That's free money! If you are not maximising your pension contribution match from your employer, then go and change that - otherwise you are missing out on free money (the best kind).
• Tax-Free Investing Accounts - investing accounts such as Stocks and Shares ISAs (UK) and Roth IRAs (USA) can be opened through investment brokerages and the like. We want to pay as little taxes as possible on our investments to maximise our returns. The likes of ISAs offer tax-free growth - so you contribute income that has already been taxed, but any earnings from those investments are not taxed. These accounts do have some limitations (for example, the UK government currently puts a cap of £20,000 on the amount that individuals can contribute to an ISA each year), but overall these accounts can help you save tens if not hundreds of thousands of pounds in the long-run.

Once again, minmising fees is the key to maximising returns. Sites like Vanguard tend to offer great low fee accounts. Do some research and find the best options for you.

Having set up your Stocks and Shares ISA, set up your checking account to automatically deposit money every month. Start by automatically transferring 10% of your monthly income, if possible. Review this amount once per year and adjust as needed.

An important rule of thumb is that you should only invest money that you will not need within the next 5 years, as withdrawing earlier comes with the risk of losing money, incurring penalties, and diminishing long-term returns.

Planning Your Spending: Opening Savings Accounts

Savings accounts are what we will use to save money that we know we need within the next 5 years. This can include things like:

• An emergency fund
• Holidays
• Buying a house

Essentially any relatively large expenses in the medium-term.

Make sure that before you open up an ISA or investment account that you have an emergency fund. If you don't have one, start automatically contributing to your savings account until you have 3-6 months worth of expenses.

We use a savings account rather than a normal checking account for two reasons:

1. Keeping the money separate has the psychological benefit of removing it from our immediate access.
2. We will use high interest savings accounts to ensure that our money is still earning money from interest, and so not losing value due to inflation.

Once again, we want to minimise fees and get the highest interest rates possible.

Also, be intentional on which type of savings accounts you choose. Consider how easily accessible the money is (some lock it away for a fixed time) and how long you can keep the account for. Some accounts are fixed term (e.g., you can only have it for one year).

Consider what your own needs and make a selection.

Once set up, schedule automatic monthly payments from your checking account to your savings account. Aim for around 5-10% of your monthly income.

Commons Mistakes

1) Over-Automation and Under-Reviewing

We don't want to totally lose track of our finances. At least once per year you should review the state of your investment accounts. You should also be reviewing the amounts that you are contributing to each of your different accounts.

2) Too Much Research, Too Little Action

Remember, the most important thing is to take action!

We don't want to get so lost in the research and learning that we do nothing. Analysis paralysis is a real danger.

3) Ignoring Fees

Fees can significantly impact your returns, particularly in your long-term investing accounts. Prioritise low fee accounts, such as those provided by Vanguard.

Take Action

Take your first step to creating your automated finance system today.

Research credit cards, savings, or investing accounts. Spend a couple of hours doing this and then apply for one. When you run into questions, do more research and keep the ball rolling.

Do one thing per day until you completely automate your system. You'll be surprised at how quickly you can build momentum.

Thanks for reading friends. If you enjoyed this, forward it to a friend who’d love it too.

Jack

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