… Or at least your budget. If you’re one of those people who are “allergic” to
budgeting I challenge you to take one day to set up some basic accounts and
automate your financial life.
Instead of stressing out about how to set aside money each time a
paycheck comes in, or worse, blowing your paycheck each week, let the power of
automation help you.
You can automate based on whatever budget you like. There are many arguments to be made for
the best budgeting plan, but what’s most important is that you put SOME plan in
place. For the purposes of
simplicity and getting started I’m going to suggest a fairly simple plan. You can set up as many separate
accounts as you like or need as you get the hang of things or find certain new
categories in your life that you’d like to fund (for example, an account for
your children), but for now let’s keep it simple.
Expense Account
-
55% of each paycheck.
-
Held in a checking account.
-
Covers fixed monthly expenses (rent, utilities,
food, insurance, etc).
* If your expenses are more than 55% of your take home pay
that’s a big red flag. You are
living beyond your means and you need to take some time to reassess and see
where you can cut back. Read
through some other “broke and beautiful” posts for ideas.
Emergency Fund
-
10% of each paycheck until maxed out (six to one
year of living expenses).
-
Held in a high yield (preferably online) savings
account.
-
Covers unexpected expenses (medical bills, loss
of job, car breakdown, etc).
-
Once this fund is maxed out, this money can be
allocated to other accounts (I recommend retirement (specifically in the form
of a ROTH IRA) or long term savings/debt).
Retirement Account
-
10% of each paycheck.
-
Held either through your employer in a 401k or
your own retirement fund (I recommend a ROTH IRA) through a reputable brokerage
firm (ING, Vanguard, Schwab, etc).
-
Covers retirement. Not to be drawn from until then.
Debt Payment/Long
Term Savings Account
-
10% of each paycheck.
-
Gets paid directly to credit card, student
loans, or any other debt; or deposited in a high yield (preferably online)
savings account.
-
Covers debt payments and long-term savings goals
(down payment for a home or car, savings for a major renovation, etc).
Play Account
-
10% of each paycheck.
-
Held in a checking account.
-
Covers dining out, entertainment, hobbies,
indulgences, vacations, etc.
Giving Account
-
5% of each paycheck.
-
Held in a checking or easily accessible savings
account.
-
Covers gifts and charitable donations.
Now that we’ve established a sample budget structure let’s
talk about automation.
1.
If you haven’t already set up direct deposit
through your employer do so today.
Deposit your paychecks and any other forms of income into your expense account. Make sure you’ve established online access
to this account as this is how you’re going to set up the remainder of your
automation.
2.
Set up automatic bill pay from your expense account for any monthly bills you
can pay online. (Cable, mortgage,
etc).
3.
Open an account for each of the categories above
at the recommended institutions (bank, employer, or brokerage). Be sure to establish online access.
* You don’t even need to go to the bank to
open an account. Everything can be
done online or over the phone.
4.
From your Expense
Account (the place where all income is collected/deposited) start automatic
transfers through the Transfers and
Payments page of your banks‘ site to the rest of your accounts.
For Internal Accounts (held
at the same bank) Choose:
-
From (Your
checking “expenses” account).
-
To (the
appropriate account (“play”, “give”, etc)).
-
Amount (10%
or 5% of your typical paycheck depending on which account).
-
Frequency
(However often you get paid).
*If you freelance or have variable income, make transfers
bi-weekly or monthly based on your overall income for that month.
For External Accounts (held at a
different bank or brokerage) Choose:
-
Add
external account (enter account number, routing number, bank information).
-
Verify
external account.
-
Set up automation as described above (under internal
accounts).
Each bank will have a slightly
different way of automating, but they all follow roughly the same format. Adapt as necessary.
Once you’ve automated you’ll know exactly
how much money you have to “play” or “give”, etc. The automation will force you into moderation and not
overspending all the time. It will
also force you to take responsible action towards retirement and long-term
savings goals. Depending on your
budgeting plan and financial goals you can adjust the percentages, amounts, and
frequency with which you deposit into each account.
I know it’s a lot and can seem
overwhelming, but take the time.
It’s worth it. Set aside
this one day to work through setting up each account and watch your financial
goals become reality in the future- automatically.
