Financial Autopilot and the Living is Easy
U ntil the technology exists that will automatically carry out our thoughts when they’ve entered our heads, it’s up to us to put as much of our lives on financial autopilot as we can in order to increase our chances of achieving financial fulfillment. Regardless which bad habits each of us may have, the key to minimizing their impact is to not think of the good habit we are supposed to be exhibiting. Eliminating the temptation to spend needlessly by automating where our money settles down is the key to setting ourselves up for financial success
Think in IRS Limits and Max As Many Of Them Out As You CanT he most important task in setting your financial autopilot status is committing to savings and investment goals that you will not renege on. The easiest goal to go for is maxing out tax-advantaged accounts since you will receive the investment gains tax-free later and benefit from a tax break now. This year, the combined retirement investment limit increased to $54,000 from $53,000. The 401(k) contribution limit remains unchanged at $18,000, but the limit for defined contribution plans under Section 415(c)(1)(A) has increased to $54,000. This means that the balance of your post-tax savings contributions and your employer contributions to your 401(k) can come in at $36,000. The Roth IRA limit remains the same at $5,500 ($6,500 for those over 50).
Calculate the Dollars Per PaycheckI f you’re lucky, your employer may now offer you the option of determining your per-paycheck contribution to your retirement accounts on a dollar basis (instead of a percent of salary basis). Last year, I came up $7 short of the $53,000 limit because my employer only offered the percent basis calculation.
I f you have the standard 24 paycheck model, this is how you calculate how much to contribute per paycheck to get as close to maxing out the $54,000 limit. Reminder: if you have the post-tax savings option at work, take advantage of it! The link below explains why it is the most powerful emergency fund you can ever hope to have.
- To hit the pre-tax $18,000 limit: 18,000/24 (item a)
- To calculate your employer’s contributions: (Salary * percent match)/24 (item b)
- To calculate how much extra you can contribute to post-tax savings: ($54,000/24) – item a – item b
Overcome the “Something Could Go Wrong” MindsetS omething can always go wrong, but consumer protections also exist to remediate such situations. I don’t know any financial institutions that don’t have online banking tools which means that you can check in to your accounts from anywhere and at anytime. You will know if money suddenly disappeared from your account, and there will be a representative who can trace where that money ended up as well as fraud protection to protect as much of (if not all of) your funds.
I think of loss from this perspective these days: I would rather have an electronic record of my transactions to settle a dispute than be robbed of physical cash or valuables. With physical assets, there is no tracking mechanism, and that makes it a riskier proposition to me. Every time my credit card company calls me to check on a charge they think might be fraud, I feel reassured that the financial industry does have skin in the game – they don’t want to be out any more money than they need to, and fake charges which they have to eat are their liability.
Keep Accounts Open Only If You Can Easily Monitor ThemT his applies not just to the physical cards in your wallet, but also to the investment vehicles that you own. Last year, I simplified my financial life by eliminating three brokerage accounts and transferring everything into one Vanguard brokerage account. While I also have a Roth IRA and a rollover IRA with Vanguard, I love that I’m down to six financial institutions to deal with. Come tax time, this is especially appreciated as I don’t have to wait for the straggler institutions to turn in my taxes (ahem Scottrade….you were always mailing me random tax forms in April after we had already submitted our returns!).
Automate Everything You CanI f you’re married and have combined finances, this is especially critical to ensure that no one’s account goes into overdraft for something that was needed. These are the options that should be considered for financial autopilot:
- Bills (rent, insurance, credit cards, utilities)
- 401(k) and other retirement savings
- Direct deposit your paychecks
- Set up regular transfers from your checking account to your savings vehicles
- Set up regular transfers from your checking account to your non-retirement investment vehicles
- Opt for online reports and statements (though I do like to change this setting for tax documents – those I like to have on paper for ease of comparison to our online tax program)
- Use YNAB, Personal Capital, or another portfolio tracker to view all of your financial accounts
F inancial autopilot is a no-brainer if you don’t want to pay someone to manage your finance or spend time thinking about what you need to do. There really isn’t much to growing wealth anyway – put as much as you can in index funds and let your money stew. For outsize returns, this strategy won’t be for you – you will have to understand the fundamentals of stocks and take the risks that come with individual equity selection. However, you do it, set up systems that whisk the money away from you on payday so that you never miss it. What you never had can’t taunt you.