Why I Automated My Savings

What was the first personal finance book you read?

The first personal finance book I read was “The Automatic Millionaire*” by David Bach. While some of his findings have been undermined recently (see articles regarding the “Latte Factor” here, here and here), the idea of “automating my savings” stuck with me because it was simple and actionable.

Automating ones savings, Bach explains, requires structuring accounts so that a set percentage of your income is automatically transferred into a 401(k), taxable investment account and/or savings account before you can ever seen those funds in your account. Set my savings goals and then forget them day to day? Sold.

If it’s so simple, why didn’t you implement it sooner?

Prior to reading Bach’s book, I had the best of intentions when it came to saving. I really did! Every now and then, I would stress in the presence of spreadsheets and notepads and commit to pulling $1,000 a month into a savings account and mayyyyybe setting aside some money in an IRA. Perhaps I would even get around to figuring out my other tax-advantaged account.

My intentions never progressed to action and, unfortunately, I would (i) run out of money before I could ever get around to transferring it to any of my savings goals or (ii) move the money into my savings account only to “revisit” the decision later in the month and guiltily transfer the cash back into my checking account.

A year and a half after finishing Bach’s book, I acknowledged reality. In order to be financially secure, I needed to take flexibility out of the equation. In addition to knowing what hadn’t worked in the past, I knew that, at that time in my life, I was paralyzed by decision-making and would likely hem and haw myself out of ever committing to a financial decision.

After re-reading the book and consulting with friends who were a bit wiser with their money, I built a schedule – based on pay frequency and:

  • Set my 401(k) contribution to 10%. This seems high I know; but I also knew I needed to feel a little pinch and told myself I would adjust to the reduced paycheck. I did.
  • Set up recurring contributions to “Emergency Fund”. I also set up a recurring “bill pay” transaction from my checking to a high-yield savings account at Ally to fully fund my emergency fund. The extra step of having to wait several days to get the money back to my checking account deterred me from “stealing” from my savings.
  • Automate Investments. I also set up an automatic transfer into a taxable brokerage account at Vanguard, which I invested in low cost index funds.

It’s been a few years since I set up that initial “system” and I have seen my net worth triple thanks to consistent and systemic debt repayment and savings. During that time, I was able to successfully manage my money without guilt, distraction or anxiety.

What about now? Over the past two years, having adequately stretched my “savings” and “disciplined decision making” muscles, I took off the training wheels and take a more active role in managing my savings goals. It’s still not a “manual” process (because I simply do better with automation) but I goal set quarterly and annually and then set up recurring transactions (e.g. contributions to 529, 401(k), IRA and brokerage account) to match those goals.

How about you? What did you learn from your first personal finance book? What do you carry with you today? Have you automated your savings? If so, have you run into any issues?

-Barlow

* Barlow Street is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com or whatever). If you use this link, I may receive a commission.

Checking In: 2019 Financial Goals

Hello and welcome back to Barlow Street! Let’s sit for a spell and chat about our financial goals for 2019.

I believe that, unless I proactively set goals for my dollars, they will slip right through my fingers. As a result, setting financial goals has never been about putting pen to paper for me; it has been about identifying and articulating my priorities and finding ways to spend my money in a manner consistent with those priorities.

Prioritize. Goal Set. Act. Evaluate. Repeat.

Being able to point to my values and priorities when I spend money keeps my “are you stewarding your money well” anxiety and fear at bay and is, therefore, critical to my mental health. Mercifully, since I already identified my priorities for 2019 – security, restoration and accountability – all I have to do is make sure my spending aligns with them.

To ensure I could actually meet my goals, I made sure that they were realistic, achievable and somewhat flexible. For 2019, I set five financial goals which align with my 2019 priorities.

  1. Max Out 401(k) (Security Priority)
  2. Max Out Roth IRA (Security Priority)
  3. Save or Invest 10% of After-Tax Income (Security Priority)
  4. Take a Vacation (Restoration Priority)
  5. Budget Consistently and Honestly (Accountability Priority)

To keep myself honest, I am checking in once per quarter to see if a goal needs to be modified or if I need to pick up the pace. I also have a financial “accountability partner” who can give me a gentle nudge if I’m giving myself “too much grace”.

Since I have this blog now, I figured I’d capture my Q2 “check-in” here. So let’s get to it.

1. Max Out 401(k) ($19,000)

With my salary, I have to contribute approximately 10% of each paycheck to meet this goal. I confirmed with my HR department on January 1st that my pre-tax contributions were set at 10%. I also confirmed that any excess contributions would count as an After-Tax Contribution to my 401(k), which I would count toward meeting goal #3.  I also receive an employer match but don’t count that toward my financial goal. (On Pace)

2. Max Out Roth IRA ($6,000)

In 2018, I contributed $500 a month to a high-yield savings account so that I would have the $6,000 required to max out my Roth IRA this year. Since I make too much to contribute directly to a Roth, I contribute to my Roth via a “Back-Door Roth” contribution, an odd legal loophole in the tax code.

In January, I contributed the $6,000 in my sinking fund to an empty Vanguard traditional IRA and later that same week converted it into a Roth IRA. As highlighted below, I also began saving for my 2020 Roth contribution in March by contributing $500 a month to a high yield savings account. I track my savings in You Need a Budget (YNAB) to ensure I am on track for 2020.  (Complete)

Roth IRA Sinking Funds (in YNAB)

3. Save or Invest 10% of After-Tax Income

In addition to the After-Tax 401(k) contributions referenced in Goal #1, I automatically deduct ~$2,000 a month from my paycheck and send it to a high-yield savings account. I budget those funds directly into savings goals or toward my brokerage account which I use to invest in low cost index funds.

Like many, I have had some anxiety around investing this year (due to volatility in the market) and think I could benefit from a second set of eyes on my investment approach. Therefore, I’d like to meet with a financial planner by September of this year to discuss whether I have too much cash on hand and my current allocation. (On Pace)

4. Take a Vacation

I hate planning vacations and, besides milk, there is nothing that makes my stomach cramp up more than thinking through the details of getting away. As a result, I never get around to using my vacation days. However, I’ve been feeling a bit burnt out so I made taking a vacation a priority this year.

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Vacation Sinking Funds
(in YNAB)

To fund this vacation, I have been setting aside $200-300 a month in a “Vacation” sinking fund and tracking my credit card rewards in similar sinking funds since 2018 and I’m finally going to use some of that money.

I am taking (and already booked!!) two trips: (i) one to France in July and (ii) one to Iceland in October using rewards and a small bit of the cash sinking fund. Since Paris is up first, I am already researching the best place to grab coffee and eagerly awaiting early July. I’ll definitely keep you in the loop as to how vacation goes. (On Pace)

5. Budget Consistently and Honestly

As highlighted in the screen shots above, I’ve been budgeting with “You Need a Budget” (YNAB, affiliate link) for the past twenty months (or so).  In 2019, I hoped to better align my spending with my priorities and to continue growing my net worth. So far, I’ve been successful, thanks – in part – to YNAB.

I love how YNAB encourages intentional spending by forcing you to decide where to put each dollar in your budget. By setting realistic “dining out” goals and setting aside money to grab tacos with friends, I am finding less reasons to feel bad about my spending. I’d like to continue this trend for the rest of 2019. (On Pace)

What about you? What are your financial goals for 2019? How are you planning to meet them?

-Barlow