Simplify your financial life to gain freedom from unnecessary tasks and help yourself get on the path to financial freedom and independence. Here a few simple ways you can automate your personal finances so that you can enjoy time freedom as well as financial freedom.
1. Keep an ample cash reserve.
My husband used to keep a minimal amount in his checking account. The he would transfer money (constantly) to cover potential overdrafts so as not to get charged a fee. This habit was no doubt one learned in leaner times. However, it was no longer necessary, especially since the checking account currently pays more interest than the savings account! I suggested that he keep $10,000 in the checking account so he didn’t need to worry about transferring money to cover potential overdrafts.
If you don’t have extra cash on hand to pad your checking account, then make sure you have overdraft protection in place. The research on money and happiness says that most people feel happier with a healthy bank balance. This is an easy way to simplify your finances, reduce stress, and get a happiness boost!
2. Go on a money diet for a month.
Every so often, especially after a big purchase, we decide to freeze our spending and only buy essentials. This is similar to going on a short fast, which has the benefit of autophagy (your body has time to do a bit of internal house cleaning and literally eats up bad cells restoring your health). Likewise, by doing an occasional money fast, you give yourself a chance to use up those canned goods lingering in the back of your cupboard and the mystery items about to die a painful death from freezer burn. You might unearth a forgotten outfit from your closet instead of buying a new one. Or maybe you get more resourceful about entertainment. You could host a potluck supper instead of going out to dinner, watch movies at home with friends, or go for a hike. This gives you a chance to reconnect to the simple pleasures of life. And your finances get a healthy boost, as well. It is all too easy to get caught on the hedonic treadmill of life. The antidote is an occasional money diet to recalibrate your spending.
3. Simplify your spending.
Put all your spending on one credit card, preferably one with bonus points, that you pay off every month. If you can’t pay off your credit card in full each month, then you are overspending and need to immediately rein yourself in by going on the above money diet.
This simple technique makes it much easier for you to track your spending and keep an eye on expenses. We put our regular monthly bills for the phone, utilities and mortgage on autopay via direct debit from our checking account. All the shopping and groceries go on the credit card. You can also track everything for free at mint.com or PersonalCapital.com and then you don’t need a separate budget. Both have free user access so you can try it out for yourself. I personally wouldn’t use the paid version of Personal Capital, as there is no need to pay fees.
4. Put your investing on autopilot.
One simple and very effective investing strategy is called dollar-cost-averaging. You automatically invest the same amount every month into your investment of choice by setting up a direct investment. Why does this work? Without trying to time the market, you’ll be automatically buying more shares when prices are lower and fewer shares when prices are higher.
What if you have a lump sum to invest? Vanguard’s research reveals that you are likely to do better by investing lump sums straight away. This is because most of the time the stock market trends upwards over time. By waiting, you may end up paying more for the same investment. See the Vanguard study here for the details on lump-sum investing.
Investing a lump sum is much easier than remembering to invest portions over a period of time. If you do come into a windfall, you can put it into your IRA, 401K and 529 education accounts and other investments right away. Yes, there is a risk that markets will drop, but that risk is always there, so waiting won’t make that risk disappear any time soon.
If you have a large cash reserve on hand, you can fund your IRAs and such once a year. However, if you are like most people, you’ll probably need to add money on a monthly basis.
Set up your accounts for regular automatic investing and you can relax knowing that in market downturns you’ll be automatically buying at the best of times. I have set up all my 401K, IRA and 529 education accounts at Vanguard. It’s very easy to link to your checking account and set up automatic debits as often as you want.
5. Simplify your investments.
You can simplify your investments by sticking to well-diversified, low-cost, indexed funds that automatically rebalance such as Vanguard’s LifeStrategy funds or Target Retirement Funds. Once you are set up, you can forget about it for years on end.
There is no need to buy individual stocks as that may increase your risk by lowering your diversification. If you really must have active investments, why not let someone with a remarkably long track record, like Warren Buffett, do the investing for you? Simply buy some Berkshire Hathaway shares and you now have an active portfolio.
Although Warren Buffett himself famously advised his heirs to invest 90% in the S&P 500 and the rest in an aggregate bond fund. It doesn’t get much simpler than that!
If you avoid the complications of peer-to-peer lending, crowd-funded investments and bitcoin, you also keep your financial life simpler. (Full disclosure: I am invested in Berkshire Hathaway B shares. But am not an affiliate with them).
6. A simple way to be a sophisticated investor.
If you are an advanced investor and have a significant sum to invest, you may want to consider the more sophisticated quantitative investment strategies at allocatesmartly.com. This website analyses all the best quantitative investment strategies and let’s you pick the ones you want with a free membership. Your only task is monthly rebalancing and they make it easy to do. This is the simplest way to engage in highly sophisticated investment strategies.
Before you rush out, it might be wise to remember that the 60/40 plain vanilla indexed fund did very well the last 40 years. More complicated strategies may or may not pay off in the future. These strategies typically require monthly rebalancing.
7. Do it once.
Many financial decisions only need to be made once in a lifetime and changed only when a major life event such as a divorce, marriage or death occurs. Once you have a financial plan in place for your major financial goals you can set up and automate your monthly investments into them for years without the need to check up on them or change things around.
Once you set up a will or a trust, you only need to change it if you have a life change. The more you can automate, the easier it is to stick to your financial plan. If you tinker too often, you may not be as successful. According to a long-since deleted Fidelity study, the best investors are either dead or forgot they had the account. This means that our monkey brains get in the way of good investing results. And, as many have said, good investing is about as exciting as watching paint dry. Get your thrills somewhere else in life!