A New Investor's Best Friend: Automation

April 16, 2022

You would think finance is solely about crunching the numbers and hitting the best investment opportunity. But you'd be wrong. It's much more personal than that for many. Over the years, I've realized most financial problems could be funneled into a single psychological component: discipline. You hear about people "taking action" and "just starting". And while these are all wonderful lessons, sometimes you need an extra push with them. Even if I push clients to take the first step, more effort is needed to ensure the next steps are taken. So I utilize my assistant to make sure clients make ongoing contributions: automation. Automation allows people to take action without even realizing it by creating preset transfers. In truth, I would argue this is THE most important part of the financial plan. When your paycheck hits, your money goes into one of three areas: mandatory expenses, discretionary expenses, or financial needs. We can get as creative as we can going into these sections. Personal finance is, after all, personal. But as a beginner, there are three methods worth considering: The 50/30/20 method, visualizing your automation, and reverse budgeting.

The 50/30/20 Method: A Simple Layout for New Investors

Generally speaking, when you receive your paycheck, you need a game plan of attack on where to allocate them. The 50/30/20 method provides a framework when you don't know where to start. Over time, this allocation will get adjusted as new priorities come up. Here's how it's broken down:

50% - Mandatory Expenses (Needs)

These are the expenses that you need to survive another day. Another way I like to frame this is if you lost a job and needed to survive for a couple of months, which expenses are vital to paying the bills? Netflix is great for entertainment looking for another job, but you need food to survive another day. Examples:

  • Rent
  • Groceries
  • Electricity
  • Gas
  • Transportation

30% - Discretionary Expenses (Wants)

These are basically all other expenses that are not required to survive. The point is really to categorize these expenses separately from your needs so you can allocate your paycheck appropriately and set limits. These expenses not only are easy to target when changes are necessary, but they can also immediately impact budgeting changes. Examples:

  • Dining Out
  • Subscriptions
  • Shopping
  • Drinks

20% - Financial Goals

These are dedicated to your financial goals, including savings, debt repayments, and investment strategies. This number will vary from person to person, but generally speaking, 20% is a strong savings percentage when handling your financial goals on your own. If you are able to create positive cash flow, this is the strongest benchmark to aim towards.

Now I want to make this very clear. Over time, your allocation amounts will and should look different from everyone else's. The allocation amounts in these three areas will adjust as new goals and obstacles come through. But when you need a point to start at, this is a great method that has worked for many in their beginning years.

Visualizing Your Automation

Want to take a step further? Create a visual for your automation! Setting auto transfers is great, but it'll be challenging to monitor and adjust over time without seeing the full picture. What I enjoy doing is creating a visual for clients to reference when showing their automation strategy in their financial plans. It's a great way to know where your money is going. Below is an example:

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Reverse Budgeting

There is a common saying to live below your means or simply spend less than you earn. There are lots of ways to approach your expenses when you analyze your cash flow. A method I like is called "reverse budgeting". This means you automatically pay yourself first before you make any expenses. When you normally budget, you first determine your expenses, and then you work with the rest. Reverse budgeting is the opposite and transfers your savings out FIRST, and then you figure out your budgeting. So if I made $5,000 for the month and wanted to save 20%, I would transfer $1,000 out FIRST and then have $4,000 left to spend. In doing so, I've already determined my monthly expense amount is $4,000 by taking the funds out first rather than pre-determining my expenses beforehand. It sounds ridiculous at first, but you actually do this method all the time without realizing it. Doesn't your employer automatically withhold your taxes before giving them to you? Aren't you forced to adjust your expenses based on what lands in your account? All you are doing is creating your own withholding for yourself. It can make all the difference. Give it a shot.

Bonus Reading: SECURE ACT 2.0

If you haven't heard the news, the House of Representatives passed a bill dubbed "Secure Act 2.0" to the Senate with some huge changes underway for qualified retirement plans. The details of this bill indicate one objective in mind: encouraging Americans to further contribute towards their retirement plans with beneficial adjustments. This is subject to change depending on what gets passed in Senate, but if passed, these changes would be occurring at the start of 2023. Some of the proposed highlights include the following:

  • Required minimum distribution (RMD) pushed from 72 to 75 years old
  • Increasing catch-up contribution from $6,500 to $10,000
  • Allows employers to match with Roth dollars (My personal favorite*)
  • Mandatory enrollment for new employees starts with a match of 3% and rises over time until the employee is contributing 10%. Employees can opt-out of this. (Exceptions to this rule include those with 10 or fewer employees, those in business less than 3 years, and church or governmental plans)
  • Retirement match program for student loan payments (Ex. $200 towards a student loan would create a $200 match into their retirement plan)
  • Establishing SAVERS credit for lower-income workers to receive tax breaks when they save for retirement and make it easier for military spouses to contribute
  • And more...


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