How I Automate My Finances

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Hey, what's going on, friends?

So in this video,

we are talking about something

that I haven't covered on this channel in quite some time,

which is personal finances.

Specifically, in this video,

we are gonna talk about the single habit

that more than any other allowed me to save up around $300,000 in my

various investment accounts,

over the last 10

or so years since I started investing money back in college.

Now that number on screen right there is not intended to be a flex

of any kind,

and it's also very much not intended to be something you should be comparing

your own financial situation against.

The only reason I am putting

that number on screen right now is to give a specific

and concrete example of just how powerful the concept

and the habit that we're gonna talk about today is.

And that habit is called financial automation, or automating your finances.

This is something I talked about in my recent video on seven books everyone

in their 20s should read.

And I had a few people asking me to explain it in a bit

more detail.

So that is what I'm doing in this video.

So essentially, automating your finances means first identifying the habits

and the actions that you need to take to meet your financial goals,

be it buying a house

or getting out of student debt

or saving for retirement,

and then taking those actions

and handing a lot of them off to a robot.

Or to be more accurate,

to a computer or a piece of software

or a website that takes care of these actions for you.

So in this video,

I'm gonna teach you exactly why financial automation is so powerful,

why I practice it in almost every area of my life where I can

do it,

and we're gonna go through specifically how I automate my own finances in two

key areas,

bill automation and investment automation.

So first, let's start with the why.

Why do you wanna go through all the trouble of setting up financial automations?

Well, there are a couple of key benefits here.

Number one, you get access to a safety net

and to huge peace of mind,

because when you automate your finances, you will never miss a credit card payment.

You'll never miss a bill payment.

If there's something you are supposed to pay, it is going to get paid.

Even if you're on vacation or you forgot to do it, or I dunno,

for some reason, you're a sentient bear watching this video

and you're gonna go hibernate for the winter

and sleep for three months.

Doesn't matter, your stuff is getting paid.

Additionally, when you automate your savings and your investments, your consistency goes way,

way up.

And as a result,

you're almost certainly going to invest

and save a lot more over the course of your life.

In fact, that is the reason I've been able to save more than $300,000

over the past 10 years.

Back when I was a sophomore in college,

I opened my very first investment account over at Vanguard.

And because I had read about financial automation in

that book that I recommended in a very recent video of mine,

"Your Money: The Missing Manual" by J.D.

Roth, I set up an automatic deposit from my bank account to

that investment account every single month.

Now at the time it was very small.

I think I started out with 50 bucks a month going in there,

just a little bit of money from my part-time job being invested.

But over time, I increased those amounts.

And as I got into my career, they became significantly larger.

And the most important thing is that they were happening every single month.

And this consistency can be incredibly powerful.

And I wanna give you just a small example of that.

Say I would have started investing when I was a baby, back in 1991.

Super smart baby Thomas.

And I was putting $500 a month into essentially the entire stock market,

an index fund that tracks the entire stock market.

That's $500 a month

which adds up to 6,000 a year

or 180,000 over the course of the last 30 years,

from 1991 to 2021.

But if they had done

that consistently and they never took any money out of the market in the

meantime,

their money today would be worth $1.6 million.

Imagine, saving 180,000 and turning it into 1.6 million.

It sounds crazy, but it's actually something

that can be done quite reasonably by leveraging compound interest

and by being consistent in your savings.

And think about the person who is doing this manually.

If they're going in every single month

and making the decision to invest in the market

or to move money from their checking to their savings account,

that's 12 times a year they have to go in and manually do that,

which means that they are potentially setting themselves up for failure every single time.

They might forget, they might be on vacation,

or they might justify to themselves

that they need to spend the money on something else this time,

and hey, I'm just gonna get back onto it next time, I totally swear,

man.

That's one month they missed the robot certainly wouldn't miss.

So for these reasons,

I think learning to automate your finances is one of the most important personal

finance habits that you can learn.

But there is at least one preliminary step

that you should understand

and make sure you have taken before you start doing it,

especially when we're talking about investing.

And that is establishing what is called a cash buffer.

And to explain that,

I actually wanna show you something

that I've been developing in my spare time called the Personal Finance Tech Tree.

So I grew up playing games like Civilization, where they had these tech trees.

You had to learn things like metallurgy before you could learn ballistics,

things like that.

And I've always thought about my personal finance journey in a certain way that's

kinda similar to that.

I have to do certain things,

either learn certain things

or hit certain financial milestones before I can move on to the next thing.

So I've been thinking to myself,

could I create a sort of actual map for these different financial milestones?

And I've been working on this in a tool called Whimsical

that I'm gonna show you here.

So basically I have these little mapped out paths here for things like savings,

regular income, installment loans, and basic budgeting.

But the specific part

that I want to zoom in on right now is the one month cash

buffer.

This is what I think you should establish before you start automating your finances.

And we can see here that this leads to first,

a three month cash buffer, and then to the start of your investing journey.

But the real reason you wanna make sure you have a one month cash

buffer is if you are automating your investments,

you're automating bill payments.

You're automating deposits from your bank account into maybe an investment account

or a savings account,

and you don't want those automations to draw your bank account down below zero.

So essentially, a one month cash buffer is a buffer of cash for one

month's expenses beyond what you're going to spend this month.

And when you have established that in your bank account,

you can be sure that your current expenses, your bills, your investments, your savings,

your debt payments, are never going to draw your bank account down to a

negative balance.

Once you've hit that milestone,

I think it's a very good idea to start looking at how you can

automate different parts of your financial life.

So let's now talk about how I automate the bill payments in my life.

Basically, anything that is a regular monthly payment I have on autopay,

if I can do it.

So that includes my mortgage,

that included my rent when I was paying rent for an apartment,

that includes my utilities payments.

So internet, gas, electric, water, and that includes every credit card that I have.

And to go on a bit of a tangent about credit cards for a

second,

I do not use credit cards as credit cards.

So your credit card gives you access to credit,

which you might even be able to tap even

if you don't have

that much money on hand.

I do not view credit cards that way.

For me, a credit card is simply a pass-through vehicle for money

that I already have

and I was already going to spend.

I simply use credit cards to get access to airline points

and different perks and to build my credit score over time.

And I always, always, always,

always pay off my credit card's balance in full every single month.

I have never once paid a cent of interest to the credit card companies,

and I think that is a goal that all of us should aspire to.

The credit industry calls people like us deadbeats

because we don't make the credit card companies a whole lot of money.

And I think everyone should aspire to be a deadbeat.

That being said, maybe you have some credit card debt right now

that you can't pay off in full,

but what you should at least do is what I do.

Go into your credit card and enable autopay.

At the very least for the minimum payment.

And the huge reason for this is

that your credit score is determined by several different factors,

but one of the biggest is your percentage of on-time payments.

And even one missed payment can be a huge ding to your credit score.

So I always autopay my credit cards because it is a safety net.

Even if I get knocked out for two months for some reason,

or I get lost in the jungle for some reason,

my credit card is going to get paid because the autopayment is set up.

The other area where I use financial automation in my life is with my

savings and my investments.

So I have some automatic rules with my bank account to have money transferred

from my checking to my savings every single month.

And then I have some different investments

that are automatically funded

and deposited every single month

as well.

The main one is my 401(K) through my company.

That money goes into the 401(K) account before I even pay myself my payroll.

And if you work for a company that offers a 401(K),

it's a very good idea to do this.

Especially if they offer matching, because that's essentially free money.

And then I also have a few different taxable investing accounts,

basically non-retirement accounts, that I automatically invest into as well.

Now there are some good habits to practice in addition to financial automation

that are gonna make sure you don't run into problems in the future.

And I think the first one is to put bill due dates on your

calendar.

You at least wanna know when your bills are going to be charged,

even if they are automatically being taken out of your account.

You basically wanna stay on top of your finances.

And the second big habit actually kinda goes into the exact same idea here.

It's to do what's called a monthly review of your finances.

Essentially, the robots are taking the actions for me, but every single month,

I'm coming in and I'm staying on top of all of my accounts.

I'm making sure I know where all my accounts are,

how much money I have, and overall,

I'm making sure that I have a clear picture of my personal financial health.

I think only a fool sets up machines

and then doesn't check up on them every once in a

while.

So by checking up, and by making sure I know everything that's going on,

I prevent myself from getting blindsided.

In fact, I take this one step further.

I don't just check over my balances.

I actually have a custom-built spreadsheet

that I made to do some financial planning,

to actually look over my average income, my average expenses,

my average savings and investing goals.

And I even have formulas

that will show me how much roughly I'm gonna pay in taxes,

what my take home pay is gonna be,

and my percentage is split between how much money I'm spending on my car,

my housing, how much I'm saving, and how much I'm investing.

I even turned this into a completely free template

that anybody else can download

and use.

But what I haven't done up until this point is actually make a video

showing exactly how I use it

and how it works.

So I have finally done that,

I've made a complete and full-length companion video to this video,

going into how I use this template

and how I plan out my financial decisions,

and I've uploaded it to Nebula.

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