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If you want to win with money, your first goal should be to get out of debt. If you can eliminate your debt and STAY out of debt, you have a much better chance of becoming wealthy. But once you've tackled the debt monster, your next step should be to simplify and automate your finances so that your bills are always paid and you're paying yourself first.
Automating your finances not only helps to prevent you from missing a bill payment, but it also helps to get you in the habit of always saving money each month. It's so easy to go through the entire month and not think about saving money.
Our culture has become accustomed to making a bunch of money each month and spending every dime right up to the next paycheck. The mentality of “living paycheck to paycheck” is not a desirable one, but many people find themselves doing it on a monthly basis. So, how do you break that cycle? Easy, automate your finances! Here's how:
1. Consolidate your bank accounts
First, make sure you simplify your bank accounts. My wife and I have one checking account, one savings account (with multiple sub-savings accounts using ING Direct), one credit card, and each one retirement account. This is really all you need. Having 3 checking accounts, 4 savings accounts with four different banks, 3 investment accounts, and 4 credit cards is just WAY too confusing and too much to think about. Consider consolidating all of your accounts into 3 or 4 accounts all under the same banking institution.
2. Get overdraft protection
Since you'll be automating your finances and your bills, there may be an adjustment period where you're having trouble budgeting and keeping your checking account balanced. If your bank allows it, it's a good idea to get overdraft protection. This links up your savings account to your checking account so if an automated payment overdrafts your account, then it'll draw from your savings account and charge a $5 or $10 fee, rather than the gaudy $35 to $45 fees banks charge for overdrafting.
3. Set up direct deposit
If your paycheck isn't being direct deposited and your employer offers it, sign up NOW! You generally get access to your check money quicker than picking up a paper check, and it's just more efficient.
4. Pay yourself first
When setting up your direct deposit, there should be a section that asks you to allocate which bank accounts and what percentage to deposit the money. Most people just choose their checking account and put 100% of their paycheck in there. Instead of doing that, pay yourself first. Choose 90% to go straight to your checking account and 10% to your savings account. This way, an automatic 10% of your money is going straight to savings before you even have a chance to spend it in your checking account. I'm not saying that you should only save 10%, but at least you've set that aside each month even if you end up saving nothing else for the month.
5. Automate your fixed bills
Some of your bills hardly ever change such as cell phone bill, cable/internet bill, and car insurance. These are all great bills to put on auto-draft, so you never have to think about paying them. They just come straight out of your account at the same time each month. I don't recommend putting your utility bill on auto-draft, because it can tend to fluctuate. If you do want to automate it however, make sure you keep a decent cash cushion in your checking account, and definitely sign up for overdraft protection.
6. Automate retirement investment
This is a no-brainer. None of us want to think about our future 30 years from now, so it's really hard to consciously put money away for retirement. I love 401k's that offer a match, mainly because you can get the money drafted out of your paycheck before you even see it, and you truly get free money. If your employer doesn't have a good 401k program and you open an IRA account, almost all of the online and traditional brokers have programs that will auto-draft a certain amount from your checking/savings account each month.
Automating your finances takes away stress and allows you more time to come up with ways to MAKE MORE MONEY. Don't let your money run you. Set up processes and automations that make your finances feel effortless. What are you doing today to automate your finances?
Erik Folgate is a columnist for the Money Crashers personal finance blog where he frequently writes about various topics like getting out of debt, small business, building wealth, and saving money for the future.