Your entire financial life should be automated
How badly do you want Froggyland?
Retirement accounts in the US hold tens of trillions of dollars in assets. Most of this wealth was built on a simple foundation: a small portion of each paycheck automatically withheld, transferred to a work retirement account, and invested. Some plan participants have never even created an online account, and began investing for their future because they didn’t opt out. Anyone who has used this system knows how effortless it is.
It's now possible to automate most of your financial workflow in the same way. At one point, I was manually paying several credit cards and an auto loan, and transferring money to my brokerage account to buy investments. Now I don’t do any of that!
Every transfer in this flow diagram can happen without your fingers tip-tapping. And once your money is in each investment account, it can be automatically invested.
Want to save $3,000 for your dream vacation to Froggyland in eight months? Let’s say your paychecks are biweekly, which means you’ll have about 17 pay periods in the next eight months. Set up a labeled savings account called Froggyland and schedule a transfer of $180 from your checking account biweekly. You won’t have to remember to save every two weeks, or wonder if it’s really worth doing now, or just let it pass because you were busy. You saved for vacation with a single decision.
This example highlights the importance of aligning your transfers with your paychecks. If you transfer $180 on the same day as each paycheck, you’ll miss it a lot less! You can do the same with transfers to your investment accounts. Or you could even direct deposit to your savings account and brokerage account, so it never touches your checking.
It’s also convenient to align all your credit card payments — and installment loan payments, if you have any — on the same day of the month, like the 1st. You can do this online with some banks, and at others you have to call. When setting up autopay, be careful to check whether it will begin on the next due date, or if you need to pay manually one more time.
A setup like this embodies the aphorism: “Do not save what is left after spending; spend what is left after saving.” Once you automate your saving, does that mean you’re stuck with a decision if it no longer works for you? Of course not! But it means that your financial habits are guided by your reflective self, not your impulsive self.
Depending on the account, you may also be able to automatically invest the money you transferred automatically. You don’t have control over whether the health savings account (HSA) chosen by your employer allows automatic investment, but you can certainly choose a brokerage that lets you automatically buy ETFs in your taxable account. If you want, you can use your brokerage account as a savings account, because there are better risk-free options available. We have a post on where to keep your savings.
What kinds of automated trading are available at the four mainstream brokers?
Vanguard: mutual funds and Vanguard ETFs only.
E*Trade: mutual funds and a limited list of ETFs.
Schwab: mutual funds.
Fidelity: mutual funds, stocks, and ETFs.
Fidelity is the clear leader at the moment, and they allow you to invest any amount in ETFs with fractional shares. If your investments are simple and you want to buy a small group of ETFs forever, then Vanguard or E*Trade could also serve you well. To minimize tax, I recommend holding stock ETFs, not stock mutual funds, in your taxable brokerage account.
Once you schedule recurring transfers and ETF purchases, using your personal accounts will be as effortless as investing in a 401(k). And if you have a loan on which you’d ideally like to pay more if you had the discipline, you can automate higher loan payments too.
Creating a system of transfers forces you to pick specific goals and implement a plan in the real world. It doesn’t have to be a long-term plan, but it’ll be a solid plan with numbers — a lot more than most people have.
Some silly excuses
You think you have a reason not to automate?? We’ll see about that.
“I don’t have enough money.”
Okay, maybe that’s true. If you actually have no income, then you should automate your bill payments and call it a day. But if you’re making any money at all, you can save something, even if it’s a hilariously small amount with each paycheck. By establishing your system, you’ll make it easy to just change the numbers once your income rises.
“I have irregular income. In some months I make way more than other months.”
Ramit Sethi has a great suggestion in this video: build a three-month supply of cash that you can use to simulate a stable income. In some months with low income, your stockpile will shrink as you save and invest your normal amounts. In months with high income, your supply of cash will recover. Regardless of each month’s income, your cash buffer lets you keep a consistent, automated schedule of saving and investing.
“If I don’t know exactly how much will be leaving my checking account, I won’t know how much I need to keep there.”
Yes, you’ll need a small cash buffer even if your income and expenses are relatively stable. Some people who are interested in personal finance become fixated on optimizing every dollar. I promise it feels good to loosen up on that. It’s not really optimal to keep a minimal balance in your checking account to earn $4 more interest per month, if it means you have to monitor your accounts to avoid overdrafting.
One way to minimize the need for a buffer is to alternate your bill payments and money transfers, instead of doing them all at once. Pay your credit cards, loans, and rent or mortgage at the beginning of the month. Then schedule transfers to your savings and investment accounts in the middle of the month. Personally, I have the same transfers after every paycheck. This requires a bigger cash buffer, but it’s simple. On top of that, it’s a widespread experience that keeping more money in your checking account makes you feel richer. I noticed it myself when I stopped trying to minimize my checking account balance.
“My expenses are all over the place. I can’t save the same amount each month.”
That’s fine! You can use the large buffer approach for people with irregular income. Or if you dislike that option, decide how much you can definitely save each month. Automate your savings and investments around that number. Then set a reminder each month (or every other month) to check how much more you can save manually. That’s not ideal, but it still takes a lot of work off your hands!
“I like to check my credit cards for fraudulent charges before I pay them.”
Some people get really hung up on this. You can automate credit card payments and still set a reminder to check your account before the due date. Even if you forget, paying for a fraudulent charge does not commit you to it. You have 60 days to dispute for reasons like receiving a damaged product, and there’s no time limit to dispute fraudulent credit card charges.
The power of defaults
If people acted rationally in any context, you would hope one of them would be retirement investing. Of course, some people do. But despite its importance, many people conform to the default option. If the default is contributing nothing to their 401(k), that’s what they’ll do. If the default is 3% of their gross income invested in a target date retirement fund, they’ll go along with that. But even when someone does care, defaults lay down the landscape: which options are easy, and which are hard?
The question isn’t whether you could take all the right actions by exerting enough willpower every day for the rest of your life. Sure, that’s possible. The question is, do you want to make it easy or hard for yourself? Wouldn’t you rather do the right thing by default? Not only does it feel great to be free of repetitive tasks, but it gives you bandwidth to focus on big-picture questions. Are you saving and investing the right amounts? What could you do to earn significantly more over the next five years? If you had to spend a little extra money, how could you use it to make yourself happier? Bill-paying is a distraction from better things to think about.
One of the most likely reasons a disciplined saver might stop investing is that a market downturn leads them to hesitate or panic. It is so easy to just skip this week’s investment (then the next, and the next), or to rationalize a change to your plan, if you have to manually log into your account and hit “buy” every time. Automation keeps you investing with every paycheck, regardless of your emotions about the market.
Consider, if you haven’t already done it: your credit card bills and any installment loans on autopay, your savings transferred after each paycheck, and your chosen investments purchased on a regular schedule. Whether the market is up or down, and even if you’re too busy to think about it — your system runs like clockwork.
See you next week.
Further resources
Every Money IRL post is organized in The Omni-Post, and all vocab terms are here.
Thanks to Ramit Sethi for convincing me to automate my finances. Before I watched his YouTube channel, I was paying my credit cards and transferring money and buying investments manually. Ramit’s videos on automation are great tutorials and may help if you’re stuck on a logistical detail. His podcast, Money for Couples, is one of my favorites.
If you aren’t familiar with some of the terms used above, like “ETFs” and “mutual funds”, please check out the gentle intro to investing.
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I actually thought you made up Froggyland but googled it & was surprised to see Croatia 😊
I need Froggyland