Wealth Building Tip #2 Automation
If you have held a W-2 job, then you are all too familiar with earning money, getting taxed, and then having the rest as spending money.
Many people fall into the trap of living paycheck to paycheck, without (in their mind) any way of setting aside ANYTHING for savings.
If you consider that a person making $50,000 will pay at least $10,000 of that money to Uncle Sam, and not bat an eye. On the flip side, asking to build a nestegg of $1,500 in a year seems like something insurmountable.
Easy solution, just like taxes are automatically taken out, and you make it work, do the same with your savings, AUTOMATE.
Math Fun For Savings Automation:
$1,500 / 365 days in a year = Needing to save $4.10 per day.
Paid bi-weekly (1500/26) that comes out to $57.69 per paycheck.
Most banks these days can set up automatic transfers into a savings account, or you can ask your employer to set aside a direct deposit of $57.69 into a different account than your checking account.
This strategy will work just like when taxes are taken out of your check before you see it, the same can happen with your savings.
Let automation happen, and grow your nestegg without even thinking about it!
Suppose your goal is more ambitious, and you are looking to save more long term, like $50,000 in 5 years.
Using simple math, and automation, you can achieve that goal:
$50,000 / (5 years * 26 payrolls) = $385.62 taken out of each paycheck.
This number may seem like a lot, but when it is taken out like taxes before you see it, the pain is very minimal.
Force Yourself To Make It Happen:
We humans have a great ability to make due with what we have. If your will for your goal is strong enough, you can easily make this work.
“But Andrew, my situation is different, I have [insert excuse]”
I’m sure your situation is difficult, but if achieving financial freedom is important to you, and you don’t have any sort of strategy, you will continue to float through life exactly how you currently are. If you have historically been paycheck to paycheck, yet received pay increases over time; the bad news is the problem is most likely that you have poor spending habits. The great news, is that this can be fixed with work and a better understanding of what you have and need.
The main issue, psychologically, with money is that we spend based on what is available, not what is needed. So when we are used to a paycheck to paycheck lifestyle, an increase in pay doesn’t solve your problems, the mentality is “now that I got more money, I have earned the ability to spend more.” This is a sure sign of financial issues.
One of the great advantages of putting together a budget is that it doesn’t matter what is being brought in. Instead, you are controlling what goes out! The less that goes out, the more you save. When working with clients, I always emphasize the benefits of focusing on what stays in the account vs what goes into it. This idea is thoroughly emphasized in tax strategies of pre-tax vs post-tax deductions. For business owners, this is a whole other level of savings covered in a future blog. The basic idea is that you don’t pay taxes until we find what is left after spending money on the business, NOT what is brought in.
Make Your Life Easy:
To make life easier, your financial institution should be able to set up the automation, regardless of your tax situation and get you moving money to your savings, without any thought or effort on your part.
With 5 minutes of answering the question: How much do I want to save? How much do I need to transfer each paycheck? Who do I need to contact (HR, etc) in order to get part of the money to automatically go into a separate account.
One of the shortfalls with savings can be the instinct to use the money in your nestegg. Because of this, I recommend putting money in a different financial institution, particularly one that has higher interest rates and is internet based. The reason for this is that it makes moving money difficult – which is a good thing!
If it is inconvenient to move money from savings to checking, you will be less likely do so. I also recommend strategies for increasing savings like putting “surprise” money away.
I do not often get checks written to me or my businesses. When they do happen, I pull out the app on my savings account and directly deposit the money into my savings account. If things like this don’t apply to you, several coaches recommend things like putting away every $5 bill that you come across and instead of spending, put it away.
Conclusion on Automatic Savings:
There are dozens of ways to automate your savings, but ultimately, it will be up to you to make sure that the system get put in place to begin with. Once that is done, it’s all gravy and you can be on your way to financial freedom!
If you live in the West Palm Beach area and are looking for financial coaching, I offer one on one coaching in Lake Worth, Wellington, Delray Beach, Boca Raton, Boynton Beach, Green Acres. If you live elsewhere, coaching plans are available for phone and video chat. Book a free 30 minute discovery session and see what you’re missing!