Hey guys, it's Ramit Sethi
from iwillteachyoutoberich.com, and scroogestrategy.com. Today I want to teach you how to automate your financial accounts. The first key to doing this is to try to get your bills to be sent to you all on the first of the month. So, what you want to do first is call up your credit card and ask them if they will switch your billing date to
the first of the month and I'm gonna assume in this example that you are also paid on
the first of the month. That just makes things easier, if you are not paid once a month, or your paid every two weeks, or your paid on the
fifteenth of the month, you can adjust these numbers accordingly. But I'm just going to keep it simple. Let's assume that your credit card bill arrives on the first of the month, and that your paid on
the first of the month. Here's what your gonna do
to automate your accounts, and it's the way I spend less
than an hour a week managing my personal finances in terms of accounts. Here's what you do. The first thing is you
take your paycheck-- I'm going to use a
little whiteboard today. So you've got your paycheck. This arrives on the first of the month. The first thing it's going to do, before the money even reaches you, is send a certain
percentage to your 401(k). And of course you want to be taking out as much money as possible
for the 401(k) match. Then you want to go over to your Roth IRA, max that out if your
under the income limit, and then if you still have money left over go back to your 401(k) and fill that up. So, before you ever see the money it's gonna come out of your paycheck and go to your 401(k). The rest of the money is
gonna go down here ... to your checking account. Your checking account-- I'm going to draw little
diagrams around it, you can see I was an art major-- is the central part of your
personal finance infrastructure. So, it's really important that you get a great checking account. I really like the Schwab High Yield
Investor checking account. It's free, there are no
minimums, no tricks, no fees, and you get a little bit
of interest earned as well, so I really like that account. You can also send in money through a pre-stamped,
pre-addressed envelope. It's pretty cool. Or you can use whatever you like, just make sure that your checking account should be a good one. All right, once you've
got your checking account, then what's going to happen is as soon as the money is transferred here it's again going to get
automatically transferred to two different places. First ... is your Roth IRA. Like I said, you're sending money to your 401(k) for the match, then your going to send
money to your Roth IRA. You want to max that
out as much as possible. The other place that your money is automatically going
to go before you see it is your savings account. And in your savings account, your gonna be having sub-savings accounts, for example, for your
wedding, for your vacation, for your house down payment. You can set those up. I do that using ING Direct. Within ING Direct you can actually create sub-savings accounts, like wedding, vacation, down payment, and it'll just track it
automatically for you. So, I use a principle
called the next 100 dollars. Of the next 100 dollars you get, how is that money going to be allocated? Of course, you want to be sending say five dollars of that 100 dollars, or five percent to your 401(k), maybe five percent to your Roth IRA, maybe five percent here to your savings, and within there one percent,
two percent, et cetera. Now you've basically, automatically transferred money to all these places. You can do this by logging
in to your savings account and setting up an automatic transfer from checking to savings. You can do the same thing by
logging into your Roth IRA, you'll connect to your checking account, you'll send a little
verification, this is all free, and you will instruct it to draw from your checking
account to your Roth IRA. Now I'll talk to you
about timing in a second, but stick with me for now. Now in your checking
account, you've got money. Now your money has already been withdrawn to the appropriate places. So you've got a few places now that you want to send
it in terms of spending. From your checking account ... you're gonna use your checking account to pay off your credit card. So what my credit card
does is once a month it reaches into my checking
account and it says, "All right, your bill
is $1,000 this month, "I'm gonna take $1,000 out
of my checking account." Of course, I know there's $1,000 there, because I know my paycheck arrives on the first of the month, and when it withdraws the bill, it's going to take it straight
from my checking account, causing me no overdrafts, because I know there's money in there. The other place you're
going to be putting money in is you're gonna be putting
it into miscellaneous bills. So, let me show you what this means. Sorry for miscellaneous bills. These are things where
you want to pay it off, but unfortunately, the
recipient doesn't accept credit cards, like rent. So for example, if you have
rent, you probably, you're-- let's say you have an
old woman for a landlord, she may not have a credit
card processing fee set up, because she's backwards and all, so you probably have to send her a check. I don't send a check manually, ever, unless I absolutely have to. I set it up so that, on, let's say the 31st
or 30th of the month, it goes from my checking
account automatically, 'cause I know the amount
is the same every month. So I set up what's called bill pay. All banks have this now
through your checking account. So a bill is automatically issued. Remember, I know there's money in here, because my paycheck is here. It sent money to my checking account, and I know there is at least $1,000 left. So an automatic check is issued on-- it's around the 26th of the month. That goes here to your landlord and you never have to touch it all. All you do is you get
an e-mail notification around the 26th saying
your check has been sent. And your landlord always gets
it on the exact rent day. There's a couple other things to this. Let's go back to your
credit card for a second. Your credit card should
have all standard bills. So we're gonna talk about bills like Rhapsody or Netflix. Anything that's a standard
amount that you know the same amount is gonna
be charged every month. So Netflix, $12 a month. Boom, it's gonna be
transferred on my credit card, and I'm never gonna have
to worry about it again. What you do, is you go into Netflix, you add your credit card and
just set up automatic billing. Of course, it will bill this, and this will be paid
off by logging into that. The other thing is your
guilt-free spending. So if you are maxing out your 401(k), if you are maxing out your Roth IRA, if you are doing a savings plan that gets you where you need to go, you definitely should be spending money. And so, you should enjoy your money. When I go out and I spend money, I don't feel guilty about it ever, partially because I'm a robot, and second because I know that the rest of my finances are being taken care of. This is where guilt-free
spending comes in. So if you spend money on a nice dinner, don't feel guilty, you
know that everything else is being handled automatically. And finally, there are
the occasional amounts where you are gonna have
to do cash withdrawals. I don't like to use cash
because I don't earn points, and, you know, it's just kinda messy. I prefer to charge
everything on my credit card so I can track it. But once in a while you are going to need to do cash withdrawals. So you may just wanna say, $100 a month, or $100 every two weeks,
whatever it may be, that's gonna come straight
from your checking, through your debit card here. Again, you'll note that there
is not a debit card use here, I don't really like debit cards very much. So I just prefer to put
everything on my credit card as much as possible. Now, we're gonna talk
about one other thing. And I'll come back to that
whiteboard in a second. But we're gonna talk
about the timing on this, because it's pretty important. Let me first sum up what
we just talked about. In this diagram, you have your-- let me sit over here-- in this diagram you have
your paycheck which arrives. It then pays your 401(k) and
it pays your checking account. You then have your checking account, which is the central part,
it's like your e-mail inbox, it pays your Roth IRA,
your savings account, which is subdivided into wedding vacation, or whatever savings goals you have, pays your credit card, your
credit card will actually reach into your checking account
and pay itself once a month. You're gonna, your checking
accounts gonna pay fixed costs that don't take credit cards, like rent or miscellaneous bills, and your occasional cash withdrawals. Your credit card, of course,
is gonna pay your fixed costs, like your bills, and it's gonna allow you to have some guilt-free spending. So that's the way you automate
your financial accounts. Now, one thing I want to
talk to you on the time. So, here's how I prefer to set it up. The first of the month, you get
paid, your paycheck arrives. The other thing is your credit
card bill should arrive. Now remember when your
bill arrives you have about two weeks to pay it
off, so keep that in mind. On the second of the month, your paycheck will pay your 401(k), your paycheck will also direct deposit into your checking account. It's really important to
set up direct deposit. First of all, you can
get a bunch of free stuff from your bank for doing it, like free checking and all this stuff. Second, you just shouldn't be having to go to the bank and deposit it. You want your money to start
earning interest right away. You also don't want to have
checks that are large enough like your paycheck to be sitting around. Get it direct deposited. You can talk to your employer in the HR department to set that up. On the fifth of the month,
your checking should pay your savings account and your Roth IRA. The reason I leave a few
days is in case your check doesn't come through for some reason, you don't wanna have an automatic transfer where your Roth is taking money
out of your checking account and you have an overdraft. So I leave a few days just to make sure you tie everything up. On the seventh of the month,
you're gonna pay your bills from your credit card and any
other miscellaneous spending. The reason I do that is
because you want to make sure that all the cash is in
your checking account, everything else has been processed. That way when your
credit card is paid off, you know the bill is $1,000,
and you're gonna make sure your checking account has
at least $1,000 in there, and it's gonna pay it off automatically. What this does is, you
should basically be getting notifications every few days saying this is what's happening,
this is what's happening. You will not really have to take an active participation in it, except to make sure that
you're not overspending. That's the one area I missed. Diagram, the one area where
you can really fail is here, if you spend too much. So don't spend too much
on your credit card. But you can be able to isolate where spending is and where it's not. The other thing is it's really
important when you do this to set a central place where you store all your user names and passwords. What I did was I set up a PBwiki which is a company that I co-founded, so, you know, I guess I'm
doing a little plug for myself. You can do it in Excel, you
can do whatever you want. I use a PBwiki, because you
can access it from anywhere. And you put your, set up a little table, checking account, URL, login and password. You wanna have all your
information in one place. That way when you need to go connect these accounts together, you will be able to do that. So, you don't wanna have
to keep searching around, because it will make you
not want to do it at all. I'm gonna document more
of this in my book, "I Will Teach You To
Be Rich" where I talked exactly about how to
automate your finances. The book is called, "I
Will Teach You To Be Rich." And, you know, I cover that as well. But this is the detailed way to automate your financial accounts. I'm Ramit Sethi from
iwillteachyoutoberich.com, the personal finance site
for college students, college graduates and everyone else. And I also run a premium site called scroogestrategy.com where I
teach people how to save money and I can teach you how to save money, whether it's cutting costs, earning more, or optimizing your existing spending. Again, Ramit Sethi from
iwillteachyoutoberich.com, and scroogestrategy.com. I hope this has been helpful.
