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One of the best ways to painlessly meet your long-term financial goals is to set up an automatic system that distributes your paycheck where it needs to go — toward bills, savings accounts and emergency funds.
We asked financial advisor Anna Sergunina for tips on setting up such a system to make saving money easier.
Why is it important to automate your finances?
Automating expenses and savings is the key to achieving long-term financial security. So often, irrational human behavior gets in the way of accomplishing certain tasks, such as paying bills on time, saving for various goals or setting up an emergency fund to ward off financial catastrophe.
Human error can be almost eliminated if you set up a system where all the main pieces — taking your income, paying your various expenses and setting aside money for savings — are done for you automatically.
What's the best way to do it?
I use a system called Money Flow to help automate monthly management of income and expenses. Under the system, you can set up three financial “buckets”:
Bucket No. 1: A checking account to pay your fixed expenses (such as mortgage/rent, utilities, monthly debt payments, cell phone/internet bill).
Bucket No. 2: Another checking account to pay for your variable expenses (groceries, shoes/clothing, eating out, entertainment).
Bucket No. 3: A savings account that serves as an emergency fund for rainy-day expenses (deductible for a car accident, an expensive dental copay).
Many employers offer a way to set up automatic deposits of your payroll into multiple checking or savings accounts. That way, you can distribute your paycheck into each account based on your expenses in each category.
What kinds of savings accounts are best?
For the emergency fund, I prefer online savings accounts or money market accounts, which pay about 1% interest rate per year and are insured by the Federal Deposit Insurance Corp. This type of account allows you to separate your emergency fund into a separate bucket for more effective management. It’s out of sight, but within reach if you need the funds.
Any other tips on automating personal finances?
The sooner you set up the automated system, the less worry you will have about managing your finances. I have found from personal experience and client feedback that people using this kind of system can control their spending, pay off debts faster and save more for their financial goals.