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I learned an interesting concept in the book “The Power of Habit”.
Willpower is finite.
Intuitively, this makes sense to me. This is why I work out first thing in the morning. By the end of the day, I’m tired and distracted and I am less likely to go lift weights.
The same applies to personal finance.
While I’m passionate about the subject and deeply invested in my own financial freedom, there are days when I don’t have time to check up on my spending or my progress. This is even more common now that we have a two year old.
I don’t want to have to constantly think about what to do with my income.
If you rely on sheer willpower to do anything, your odds of achieving your goals go down drastically. If, however, you make certain actions a habit, you’re well on your way to success.
One Step Further
I took the prior concept one step further.
Instead of relying on habits to get to financial independence, what if you can automate as many of those actions as possible?
Let R2D2 do the heavy lifting.
Two habits that lend themselves to automation are saving and investing.
Automatic Saving and Investing
Instead of transfering money each paycheck to my savings account, I have my company automatically deposit the amount I want to invest into that account. I never see the money so I don’t miss it or “accidentally” spend it on something else.
The same holds true for investing. My 401(k) contributions automatically come out of my paycheck.
Additionally, I send a fixed amount of cash to my brokerage account every paycheck and invest it. Many brokerage firms let you set up automatic monthly, quarterly, or annual investments.
It’s surpisingly easy to adjust to automated savings and investing.
I don’t have to think about these two essential pillars of financial independence anymore. I don’t waste time doing these transactions manually and can instead focus on my family and writing more content for this blog.
I tried to automate savings and investing when I was younger and it caused more problems than it cured. How?
- I wasn’t living well beneath my means and didn’t have a good sense of my spending habits, so automatic deductions from my checking account caused me have a negative balance once or twice.
- I was overly aggressive with the amounts that I set up for saving and investing and it led to a lot of financial stress.
So, what are the takeaways here?
- Talk to HR and have your savings come out of your paycheck
- Doing this instead of depositing money automatically from your checking account keeps you from underestimating how much money you are free to use
- Ensure that your 401(k) contributions are also coming out of your paycheck
- I haven’t heard of contributions not being deducted this way, but I’m sure exceptions exist
- If you are investing the maximum in your 401(k) and still have more to invest, ensure that your brokerage account contributions also come straight out of your paycheck
- You can set up monthly investments or invest only when you’ve hit a minimum threshold e.g. $5,000
- Be realistic with your saving and investing goals; don’t put yourself into financial distress by being too aggressive!
- Ease into automated money management by trying it out with a small sum at first
*Disclaimer: I’m currently on a mini-retirement and have most of my automated savings/investing on hold, but this is how I structured my financial life when I still had a steady paycheck.