Wednesday, March 10, 2010

Automate Your Savings, Not Your Finances

I am a big fan of "pay yourself first," a concept shared in many books from The Richest Man in Babylon to THe Automatic Millionaire. It took me a moment when someone suggested unautomating finances to realize he was making a valid point -- a point I want to share with you today. Saving should be automatic, Investing should become automatic, and spending should be entirely manual. Let's examine all three points.

Saving should be automatic. This is the heart of paying yourself first. If you can divert 10% of your income into a savings plan, the consequences over a lifetime are spectacular. The keys are to start as early as possible and to be as aggressive as possible in your savings program. I first did this by continuing to live at my current level after I was given a raise. The raise itself went into a tax-sheltered savings program which turned out to be a lifesaver a couple decades later.

Investing should become automatic. Have you ever noticed that when apolitician talks about investing in the future, he's talking about spending money we don't have to implement something later generations may benefit from but will certainly pay for? On a personal level, investments are a long term strategic decision. THey need careful consideration, periodic review, and -- if you can get it -- expert advice. You want your automatically generated savings to fund your investments, but don't put everything in automatic until you've applied due diligence.

Spending should be entirely manual. I had always known this advice, but hadn't really said it that way before I heard about unautomating finances. While I believe in a life of convenience and comfort, putting some pebblres in the way of automated spending is probably a good thing. Here are a few things to watch for:
  • Habitual spending -- David Bach tgalks about the Latte Factor, money you spend routinely without thinking about it. If you take the time to think, you'll be a lot less likely to make coffee a ritual.
  • Subscriptions -- pay attention to how often you read magazines or take advantage of things you buy through a "xxx of the month" club. If more than half go unused or aren't really appreciated, shutting the automated cash flow of the subscription off or down may make sense. If you pay for hundreds of TV channels, does the cable company have a cheaper package you can live with?
  • Watch your credit spending. Credit scards make spending easy, they don't make paying for it easy. Using credit you will pay in full before interest accrues is okay, but even then when your fingers reach for plastic ask your self if thius expense is necessary.
  • Unshop aggressively. Don't be afraid to return something.
Finally, paying a credit card is not spending. If you cannot pay completely when the bill comes due, keep the card in your pocket until you can. When you don't pay off the card, you are buying a lending service. You are spending more by not paying than you are by paying. Credit should be something you have but rarely use.

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