You Shouldn't Be In Charge of Your Budget
Keeping to a budget is difficult and boring. Fortunately, you can solve both problems with a simple solution. Stop doing the work yourself and hand it off to a robot. By automating your finances, you can remove both the work and the human temptation to stray from your budget. And if you’ve set your budget up correctly, based on your priorities and how you want to spend your money, automation makes it easy to achieve your goals.
The Problem with Being Human
In the world of personal finance, our biggest enemy is ourselves. No matter how good we are at budgeting, debt management, investing, or any other personal finance discipline, our human brain sabotages our money management every step of the way. .
It’s not your fault though. Behavioral economics teaches us we are predisposed to do everything proper financial planning tells us not to do. Humans, it seems, are hard-wired to be bad with money.
Remove the Problem
Fortunately, the solution is already available to you through your credit union, and it won’t cost you a dime. The online banking tools on your credit union's website has everything you need to take the hard work of budgeting off your hands. Through online bill pay and the ability to set automatic transfers of funds from your checking account to your savings accounts, you can automate your finances.
How to Automate
The trick to automation is simple, set up rules in online banking to move your money where you want it. Set them once, sit back, and relax. You may need to modify some rules over time as you change your budget, but otherwise your work is done.
For monthly bills such as your mortgage/rent, cable bills, and car payments, you’ll use your checking account bill pay system. Simply enter the billing information and set an automated payment each month. Your credit union will then mail the check on the same day every month. So long as you have enough money in your checking account, you’ll never have to touch your bills again.
For your car payments, you can set how many times to send the check so the payments automatically stop when you pay off the loan. If you have a 3-year loan, tell your credit union to send 36 monthly checks and you’ll automatically stop making payments when the loan is done. No more stamps, no more writing checks, and no more finding a mailbox in the rain.
Financial & Life Goals
For your financial goals and life goals, you’ll use automated transfers to fund them. Set up a separate savings account for each of your major goals such as buying a new car, saving for a home down payment, or taking a trip to Europe. If you need to save $340 a month to achieve the goal, tell your credit union to automatically transfer $340 each month to the savings account for the goal.
For longer-term goals, such as retirement, you will want to earn more return than what a savings account offers. Fortunately, you can set up automatic transfer or bill pays to your investment accounts as well.
When to Schedule the Automated Transfers
Now, the question becomes: when should all these transfers happen? Unless you spend far less money than you make, you will want to follow a schedule to make sure your priorities are funded first.
The goal is to spend your money each month in order of your priorities. Meaning the first money you spend each month is on things most important to you. Whatever is left in your account after you complete the schedule is yours to spend as you please.
P-Day is the date you get paid. For those who are paid monthly, you will likely have your paycheck funded in your checking account on the first of the month. This makes it easy to schedule. Follow the schedule below, making P-Day the first of the month, P-Day +1 the second, P-Day +2 the third, and so on.
If you get paid twice a month, such as the first and the fifteenth, you’ll likely not get through all the automated bill pays and transfers on the first paycheck. If that is the case, get through as many as you can, with the first paycheck and stop. When the second paycheck comes on the 15th, pick up on the transfers and bill pays you have left.
P-Day +1: Necessities
The day after your paycheck hits your checking account, you’ll want to get all of your necessities paid. Necessities are expenses you need in order to maintain your health, keep your job, or comply with the law. Necessities include expenses such as your rent or mortgage, car payments, insurance premiums, and utility bills. Notice expenses such as your cell phone or cable bill are not listed here.
Ignore the due dates on all of these bills. Sending these payments as soon as the money comes into your account will ensure your most basic needs are met. Even if your car payment is due on the twelfth, send the payment in on the first day. You aren't going to gain any more interest by having an extra $300 in your checking account for nine days.
If the due dates are on the first of the month, such as your rent or mortgage, talk with your landlord or your lender to see if you can have the payment arrive a few days late. You would be surprised how flexible people are when you tell them you want to automatically send them the money as soon as you get paid.
If you are not investing for your retirement through a payroll deduction at work [such as a 401 (k)], you’ll want to set up a transfer to your IRA or other retirement account during the necessities period
. The goal is to make sure your basic needs are met with the first of your money, and securing your retirement is a necessity.
P-Day +2: Goals & Credit Cards
On the second day, you want to focus on your major goals and priorities. Whatever financial or life goals you are saving for, get that money out of your checking account right after your necessities. This is the idea of “paying yourself first:” making sure you fund your goal of buying a home before you pay for your cable bill or a night out.
For each major goal you have, you should have an associated savings or investment account. Set up automatic transfers to these accounts on P-Day +2. By the end of the second day, you have funded your monthly contributions toward your life goals.
This is also the day you should make your credit card payment, regardless of when the bill is due. Look at the last billing statement and pay off the entire balance on your credit cards. If you don’t have enough money to pay off your credit cards, it’s time to put the credit cards away. If you are working on paying off your credit card debt, the second day is when you’d make those additional payments.
For those who are paid twice a month, your entire first paycheck may have been eaten up with necessities. If this is the case, P-Day+2 would be the 16th of the month, after you have received your second paycheck.
P-Day +3: Optional Obligated Costs
On the third day, send the payments for your Optional Obligated Costs. These are the costs you have to pay every month, only because you’ve chosen to ‘sign up’ for them. These are expenses like your gym membership, your cable bill, and your cell phone.
Most of these costs are consistent month to month, making it easy to set up automated bill payments for them. Of course, when you pay them all on the same day, you’ll see how much money you spend on these expenses. And you also may have enough frustration with how much you’re paying to make a change in your life.
The nice things about Optional Obligated Costs is they are optional. You can easily cancel any of these subscriptions, or find a way to lower your expenses by switching companies or negotiating a better rate.
P-Day +4: You’re Free!
On the fourth day, you get to spend whatever is in your checking account however you want. You’ve already paid all your bills, invested for your retirement, and saved for the goals you want to accomplish. You can now spend the rest of the money in any manner you want free from worry.
Purposeful Finance is a financial education and services organization providing unbiased financial help to consumers. We were founded by a tenured professor of business wanting to provide ongoing education for former students in his Personal Finance course. Learn more at PurposefulFinance.org/our-purpose