Auto-Pilot Engaged (Pay Yourself First)

Auto-Pilot Engaged

I don’t know about you, but I can think of at least a few things I’d like to do rather than checking bank account balances, budgeting, and making trades in my brokerage account.

Fortunately, it’s possible to automate some aspects of the financial process. Think about this as flipping the “auto-pilot” switch on, so that you can spend less time and mental energy thinking about your money.

For me, I’ve settled into a rhythm of checking my account balances every couple of weeks (more out of curiosity than anything), and spending about a couple hours every 2-3 months to update my budgeting spreadsheet and make trades in my investment account.

I don’t feel stressed or burdened at all by this process. If you follow the steps below, I’m confident that it’ll be the same for you as well.

Pay Yourself First

“Paying yourself first” is an extremely simple and effective strategy that can help you meet your savings goals. The idea is that you spend what is left after saving, and not the other way around.

For example, let’s say your bi-weekly paycheck comes out to $1,500, and your goal is to save $300 out of each and every paycheck.

If you follow the pay yourself first methodology, you’d set up an auto-deposit for $300 on the day that your pay check comes in. This money could be directed to your emergency fund account, to your student loans, or to your investment brokerage account (whatever your goal is). In any case, this money is out of sight, out of mind.

With the $1,200 of your paycheck that remains after the auto-deposit, you’re free to spend that money however you choose. You don’t need to feel guilty if you order take-out or buy a new pair of shoes — as long as you manage to stay within your $1,200 budget, you’re good to go.

Save first, and spend what is left after saving.

The real power of this simple strategy is that you’ve managed to meet your savings goal without having to lift a finger or make any decisions. By automating your financial processes as much as possible, you give yourself the best chance of sticking with your plan in the long-run.

The alternative is to save what is left after spending. In that case, you’ll need to constantly monitor your purchases to make sure you’re not going off track. A night out with friends here and an impulse purchase there, and you might find that you’re short of your savings goal at the end of the month. Not fun, and not a recipe for success.

Pay yourself first, and you’ll make your life much easier.

Pre-Authorized Payments

Most companies that send you a bill on a regular basis will offer a “pre-authorized payment” option. By signing up for this, your bill will be paid automatically, without the need for you to manually log in and send your payment.

By doing this, you can stop worrying about missing a payment and being charged late penalties.

Personally, I’ve set up pre-authorized payments for my:

• Monthly subway pass
• Hydro bill
• Internet bill
• Credit card bill

If you go down this route, make sure that you regularly review your credit and debit card statements. Watch out for any unusual charges on your statement.

Your Assignment

• For your main bank account where you receive your paychecks, find out what “auto-deposit”, “auto-transfer”, or “automatic savings” options are available. Typically, you’re able to set up a recurring auto-deposit schedule specifying where the money should be moved to, the $ amount to be moved, and the frequency (every week / two weeks / month, etc.)
• Decide on the amount of money you can comfortably set aside from each paycheck. Set your auto-deposit amount at a level that will leave you with enough remaining to cover your necessities and a reasonable amount of “fun spending”. You may consider starting your auto-deposit amount relatively low until you get a hang of it, and then ratcheting it up as time goes on
  • Pro tip: if you get a raise at work, immediately increase your auto-deposit amount. This way, you can increase your savings without ever being tempted to spend away your larger paycheck
• For American readers: brokerages such as Vanguard offer the option of “automatic investing”. This is an amazing feature and takes automation one step further. After your money is automatically deposited into your Vanguard account, you can set up rules so that this new money is invested according to your chosen asset allocation. This means that you don’t have to manually make your trades. I’d highly recommend setting this up so that you can maximize your “time in the market”. Making your life much easier is another nice upside.
  • For Canadians: unfortunately, our financial scene is lagging behind the States and there aren’t any options to do automatic investing in a portfolio of index funds. I’m waiting patiently…