No one wants to keep themselves awake at night thinking about money and yet, if you're like me, that's exactly what happens sometimes. What if you could take the stress out of saving and potentially get rich while you sleep?
Yeah, I thought so. Sounds good, right?
It's simpler than you think too. There are no secrets. It's about structuring your accounts and setting up your deposits, so you can put away money without even thinking about it. After a while, if you follow the steps and stay reasonably disciplined about it, I'm sure you can put together a nice little nest egg without even worrying about it.
Link Your Accounts and Investments
Ramit Sethi, The New York Times best-selling author of I Will Teach You to Be Rich, knows that before you can automate your savings properly, you need to set up an infrastructure to be able to do that. First, he says you should link your savings accounts, whether it be a TFSA, a regular savings account or both. (It should be both: a TFSA for long-term savings and a regular savings account for short-term savings) Then link your investments, such as GICS, mutual funds, RESPS and RRSPS.
Automate Your Money Transfers
With your accounts linked together, setting up automatic transfers into each of them should be extremely easy. Just go into “Online Banking,” select “Transfers” and select the appropriate account to allocate your money into from the drop-down menu. Then, all you have to do is select the date, select recurring and you're ready to set it and forget it.
The key to making automatic transfers according to Sethi is picking a date that makes sense. “if your credit card is due on the 1st of the month, but you don’t get paid until the 15th, how does that work?,” he says.
If you're transferring money out of sync with payday and when your bills are due, you'll either be late on your bills or not have enough money to make the transfers, which will defeat the whole purpose, so the first order of business is to sync your bill due dates with payday and your desired transfer days. Simply call your creditors and switch your billing dates.
“If you’re paid on the 1st of the month, I suggest switching all your bills to arrive on or around that time, too,” says Sethi.
Assuming you get paid on the first of the month, Sethi recommends a date schedule for your automatic transfers that should help you generate savings in your sleep.
Decide on Transfer Dates and Designate Payments
Okay people, this is the most important moment if you want to be able to automate your savings and investments for the rest of your life. Sethi details a plan in his article on TheFourHourWorkWeek.com, which doesn't completely apply to the Canadian banking system because the article was written in America, but many of his recommendations can still be applied with only minor modifications. First, make sure you've set up any Canadian Pension Plan or RESP contributions off the top of your paycheque with the help of your employer if you are able. Then, the transfers come into play (assuming you are paid on the first of the month).
The 5th Day of the Month
This is when you transfer a desired percentage of your paycheque into savings. The date is set for the fifth in case you don't get your paycheque on time and need a little bit of a buffer. It also gives you time to cancel the transfer if there's a problem. The fifth should also be the day you transfer your desired amount into your investment account, such as your TFSA, GIC or other investment structure.
The 7th Day of the Month
This is the day you should auto-pay your fixed expenses and bills. Some people choose to use their credit card to pay their bills because of the rewards and benefits they receive, but just make sure you have the money in your chequing account to pay off your credit card balance on this day as well. If you are unable to pay off the balance in full, just set the amount at the minimum or something in between and you'll always pay your bills on time. Also make sure that you receive your bill via e-mail or other electronic method before the money must be paid just in case what you owe exceeds the transferred amount you designated and you can readjust on the fly.
Pat yourself on the back. You just automated your savings and investments – along with your bill payments while you were at it. Of course, no system is perfect and it may require a number of tweaks. Sethi recommends a buffer of $500 in your account so that you don't run into overdraft while your life readjusts to this newly-automated system. Everything eventually should iron itself out and you should be off to financial freedom.
Sethi has other tips for freelancers and those with irregular income as to how they can also automate their savings, but you'll have to read his full article to find out the details. For now, we ask the following:
Do you automate your savings? Tell us in the comments how you do it.
Photo credit: Tom Lin