Automate your way to prosperity
tl;dr • Set up systems that make "financial success" the path of least resistance • Pay yourself first, automatically • Cut on "Starbucks money" and harness the power of compound interest
I recently finished listening to a great audiobook, Atomic Habits by James Clear. That's an extraordinary work on how to increase your chances of building the good habits you want (and getting rid of the bad ones you don't) essentially by setting up systems in your life that turn success into the path of least resistance.
"You do not rise to the level of your goals. You fall to the level of your systems." – James Clear (probably my favorite quote from that book).
A few years back I listened to another outstanding audiobook which became my top recommendation to people who wish to improve on their personal finances, The Automatic Millionaire by David Bach. Interestingly enough, Bach's work – which is much older – pretty much promotes the application of Clear's principle with a focus on one's own finances. By easily setting up systems to automate everything finances (savings, paying off debts, and even giving money to charity), one slowly – but surely – builds his or her way towards higher levels of prosperity. It's simple and elegant.
The main mantra in The Automatic Millionaire is "pay yourself first", meaning that once you receive income, before spending that money on anything (a.k.a. "paying others"), a percentage of it must automatically go to your investment accounts. Automation is the key. It won't take long for your mind to get used to having just the remaining portion available to spend for the month, you'll adapt quickly, and your savings will continue to grow behind the scenes.
The book also gives great advice on several other personal finance key points, like retirement funds, home ownership, getting out of debt, and more. I particularly appreciated the way Bach crunches the numbers to demonstrate how small expenses such as one’s daily overpriced boutique coffee (a.k.a. "Starbucks money") can be a great hinderance to his or her savings in the long run.
Automation ideas
This is just some food for thought, not financial or tax advice, and not exhaustive by any means.
Retirement funds – Automatically contributing a portion of one’s income to a 401k through an employer – or to an IRA on their own – is a great way to “hide money” from one’s present self, making one’s future self very grateful. The tax breaks involved, and the matching contributions many employers offer (a.k.a. “free money”) make this option quite attractive to a lot of people.
Health Savings Accounts (HSAs) – Those who have a High-Deductible Health Plan can contribute a certain amount of money to an HSA every year. The funds can be kept invested, or withdrawn free of taxes to cover medical expenses. There are also many employers that make extra contributions to employees’ HSAs, more “free money” that shouldn’t be left on the table.
Index Funds – Retirement funds and HSAs have their own tax advantages, but they also have contribution limits and strict rules for withdrawing penalty free. With that, some people find it very attractive to automatically invest a portion of their income in index funds as well, such as Vanguard’s VFIAX or VTSAX. These two particular funds have low fees, and many consider them reasonable investments for the long run.
Rainy day fund – It’s usually a good idea to have some money parked in a low risk savings account for an emergency. Some suggest one should have enough to keep them for 3 months without work, others recommend having enough for 1 year or more. Regardless, starting small, setting reasonable milestones – like “first $1,000”, “enough for 1 month”, etc. – and automating the contributions is the way to go.
Interest rates may vary between savings accounts, though currently SoFi Banking pays one of the highest in the market and would be my top recommendation.Bitcoin – I don’t hide my excitement about Bitcoin and recommend all to look into it and make their own conclusions. With that said, my favorite way to automate increasing my Bitcoin allocation is by setting up direct deposit to Coinbase, which is completely fee free.
Bottom line
Read (or listen to) the book! It's a short and pleasant read which is full of gems. I wish I had discovered it when I was in my teens.
Pay yourself first in an automated way, start as early as possible, aim to get to a point where you are saving at least 15% of your income, and help yourself by mindfully reducing unnecessary expenses. The magic of compound interest will work wonders for you through the years. As a computer science professor I had used to say:
"If you understand exponential functions, you won't pay interest, you'll receive it".
Disclaimer
I may receive compensation when you click on links that I share.
This is not financial advice. I am not a certified financial planner or advisor, just an ordinary guy trying to sort out his own finances, sharing his perspective with no guarantees. Use the information provided at your own discretion. You are highly encouraged to do your own research before making any personal finance decision.