Ramit Sethi of I Will Teach You to Be Rich offers great advice (with an accompanying video) on automating your money. I'm also a big fan of automation - my paychecks are direct deposited into three accounts, my two savings accounts are funded automatically, and major bills are paid without me having to think about them (or worry about whether I have enough money in my accounts to pay them). Below is a diagram of the life of one of my paychecks, with a big disclaimer: I am not a financial planner, I do not claim this is the right or only way to manage your money, and no two people have the same bills, loans or savings goals - so take this with a grain of salt.
My paycheck is direct-deposited into three accounts:
- Savings (41%)
- This is not actually where I keep my true savings. Because it is linked to my checking and credit card accounts, I found I was often sneaking money out to pay other bills. Now I use my savings account to pay my mortgage and student loans. I like keeping that money separate from my discretionary spending because it is the most important. My rent is a high proportion of my salary because I own a home - hopefully it will be less for you! If you're wondering why my mortgage (36%) and student loan (3%) don't add up to 41%, I keep a little extra money in that account for padding (~2%).
- Checking (33%)
- My short-term savings accounts are through ING Direct, and they automatically withdraw 3% of my paycheck each month (I would really like to get this number higher). Right now I have two short-term savings accounts: my emergency fund and my car fund (for unexpected repairs). I would like to add two more for clothes and travel. Ramit has a great post on why you should also have a wedding fund (shocking how fast even "modest" weddings add up). Check it out: The 28,000 question: Why are we all hypocrites about weddings?
- Much to my chagrin, 10% of each paycheck goes to Homeowner Association Fees.
- The remaining 22% goes to discretionary spending and bills. This is the number I have to watch more closely, to make sure that I have enough to pay my bills and my credit card. (Check out my very simple process for coming up with your monthly allowance (the non-budget budget). I do not pay my bills automatically (especially cell phone bills) because they are often variable and I want to make sure I'm paying attention. Would I like more than 22% to spend on bills and fun? YES. Do I have a compelling enough reason to justify lowering my retirement savings? Not really.
- Roth 401(k) (24%)
- Because this diagram shows my paycheck after taxes, my retirement savings comes out to 24%. The actual deduction is 16% (of my gross paycheck). I am really proud of this number. Each year I try to raise it 1%, especially while I am young and don't have a family to support.
- Update: Part of the reason this number is so high is that my company has a great matching program - this is the amount needed for me to max out my contribution (therefore maxing out my free money!). If the company match was lower, I would contribute to get the maximum match, then funnel the rest of my savings into a more liquid investment account.
So there it is - a day in the life of my paycheck. This system is definitely a work-in-progress, but so far I'm happy with the way things are going. As always, I'd love to hear your strategies for making money management (and automation) easier. :)
*Side note: I may be slow to reply to comments this week because I am having eye surgery today. Eeeek! Wish me luck!