In the steps in this book so far, you've learned the few simple things you must do this year to get your fi-nances back on track. Most of them involve taking chunks of what you earn and putting them aside for particular purposes-funding an emergency account, contributing to a retirement plan, paying down credit card debt, and so on. These are all tried-and-true strategies, and taken together, they will enable you to start over and finish rich.
However, the single most important thing I've learned from working with hundreds of clients as a financial advisor, and now from coaching through my books and seminars, is that the only plans that work are the ones that are automatic! Discipline sim-ply doesn't work. Working harder to save money simply doesn't work. Discipline and hard work take time, and if your plan requires hundreds of separate actions, month after month, year after year, it will fall by the wayside when the going gets tough. Sure, we'd all like to be prudent and disciplined and thrifty. But how many of us actually are? Over the years, I've had countless clients who insisted they were disciplined enough to do it themselves. In fact, there was only one who was actually able to stick to a financial plan manually (that is, by sitting down and writing him-self checks every month) for any length of time.
The government knows we can't be trusted. That's why it came up with withholding tax. It knows that the only way to guarantee that you will pay your tax bill is to take the money from your paycheck AUTOMATICALLY before you can spend it.
This is a strategy worth imitating. You need to do for yourself what the government did for itself: Set up a system that guarantees you won't have spent all your money on other things before you get around to putting your hard-earned dollars where they are sup-posed to go-to ensuring a richer future. Set it up so that you only have to take action once and you guar-antee your success.
Even if you think you're the most disciplined person in the world, don't regard the automatic part as an optional extra. There is a reason it has its own step in this book. If you are serious about getting back on track, it's not enough to say you're going to do it. You've also got to make the process automatic.
If you follow the action steps in this chapter- along with the diagram on page 116-you will truly have a foolproof, no-brainer, "set it and forget it" fi-nancial plan that, I promise you, will work. The plan is based on the one I laid out in my book The Auto-matic Millionaire, but I've updated it for 2010. It will take you less than an hour to get it organized. Read the steps and follow the diagram. It's easy and, YES, YOU REALLY CAN DO IT.
Are you ready?
Then let's go make it automatic!
MAKING IT AUTOMATIC
IN LESS THAN AN HOUR
1. Pay yourself first automatically. In Step 6, I ex-plained the critical importance of paying yourself first-having at least 5% of what you earn deducted from your paycheck and deposited directly into a 401(k), IRA, or similar qualified retirement account before the government takes its bite of withholding tax. Ideally, this deduction should total 12.5% of your income (the equivalent of one hour's worth of work each day). But whatever you can manage, you must make the process automatic. The good news is that payroll deduction is a standard feature of most 401(k) plans, so as long as you're signed up, your contribu-tions will be automatically deducted from your pay-check. If you had made your 401(k) automatic, you would have been perfectly set up to benefit from the stock market crash of 2008. While other people were panicking and pulling their money out of the market (selling low), you would have been investing all the while, buying when stocks were at their cheapest.
If you're not eligible for a 401(k) or similar plan and as a result use an IRA for your retirement sav-ings, you'll have to create your own automatic "pay yourself first" program. Tell the bank or brokerage where you have your IRA that you want to set up a systematic investment plan. This is a plan under which money is automatically transferred on a regu-lar basis into your IRA from some other source (such as a payroll deduction). Most banks and brokerage firms will handle all the arrangements for you, con-tacting your employer's payroll department on your behalf and dealing with all the paperwork. (If your employer doesn't offer payroll deduction, you can have your retirement-plan contribution automati-cally moved from your checking account to your IRA-ideally, the day after your paycheck clears. Most banks have free online bill-paying services that allow you to schedule regular automatic payments of specified amounts to anyone you want.)
2. Deposit your paycheck automatically. If your em-ployer uses a computerized payroll system, you should be able to arrange with your company's per-sonnel or human resources department to have your pay automatically wired directly into your bank ac-count. This is known as direct deposit. It gets your pay into your account without delay-and saves you the trouble of wasting a lunch hour every week or two waiting in line at the bank with a paper check.
3. Fund your emergency account automatically. In Step 5, I explained the importance of maintaining an emergency cash cushion of at least three months' worth of expenses in an FDIC-insured bank account (not your regular checking account but a separate one set up specially for this purpose). Until this emergency account is fully funded, you should have at least 5% of your paycheck directly deposited into it. Again, if your employer doesn't offer payroll de-duction, arrange to have your bank automatically transfer the money from your checking account the day after your paycheck clears.
4. Fund your dream account automatically. What's a dream account? This is where you save the money that is going to pay for your home, car, wedding, trip to Hawaii, new boat, guitar, ski lessons, cooking school- whatever your dream happens to be. Most dreams re-quire CASH, and because most people don't have the cash, they either borrow to pay for their dream (whether by putting it on their credit cards or taking out an actual loan), or they never make the dream a reality. In some ways, your dream account is the most important account you will have, because living your dreams is where the excitement of life really is. As with your emergency fund, use either payroll deduction or your bank's online bill-pay service to have a percent-age of your paycheck automatically transferred into an FDIC-insured account set up just for this purpose. If your dream is at least three years away from fulfill-ment, start investing the money more aggressively once your dream savings total $10,000.
5. Pay your credit card bills automatically. Call all your credit card companies and arrange to have all your bills come due on the same day of the month-ideally, 10 days after your paycheck is normally deposited. (Virtu-ally every credit card company will work with you to change your due date if you ask them.) Then use your bank's online bill-paying service to automatically make the minimum payment for each of your cards five days before the bill is due. (If your bank doesn't offer free online bill paying, think about switching to one that does.) If you want to pay more than the minimum on any of your cards-and if you follow the plan I lay out in Step 3, you will-you can write a check for the extra amount. Making your minimum payments automatic ensures that you will never miss a payment deadline and get hit with late fees or penalty interest rates.
6. Pay all your monthly bills automatically. There are two kinds of monthly bills: regular ones that are al-ways the same amount (like mortgage, rent, or car payments) and those where the balance due some-times varies (like phone bills or cable and Internet charges). You can automate payment of the un-changing bills by using your bank's online bill-pay-ing service to have them automatically debited from your checking account each month. And you can au-tomate payment of the variable ones by arranging to have them charged to one of your credit cards. As long as you keep your checking account adequately funded and you have sufficient credit available on your card accounts, this will protect you from ever missing a payment due date. My entire financial life is automated this way. As a result, all my bills are al-ways paid on time, whether I am in town or not, and I never get hit with late fees or penalties.
7. Give to charity automatically. As I explain in the bonus chapter that starts on page 181, giving back is an integral part of starting over. But instead of mak-ing a lump-sum contribution once a year (which you might or might not actually get around to), arrange to automatically fund the charity of your choice through a series of small regular contributions-say, somewhere between 1% and 10% of each paycheck. Most charities will happily agree to charge your credit card or accept an automatic debit from your bank account. Choose a charity that you care about and become a monthly giver. The charity will be thrilled, and you will feel good doing it.
You've now made your financial life automatic. Congratulations! If you do nothing else from this point forward, you have set yourself up for success.
Excerpt taken from START OVER, FINISH RICH by David Bach. Copyright c 2009 by David Bach. Published by Broadway Books, a division of Random House, Inc.