Success With Money- The Power of Automation
Could you live without your laptop or smartphone for a day/week/month? I could try but it would be frustrating and painful. Life would be SO much harder. Without technology, I would miss meetings, birthdays, get lost driving downtown and lose track of my friends and family. My smartphone is my favourite tool to automate my life.
Just like in life, we can all use a tool to help us be smarter with money. One such tool is automation.
Research shows that there is more to managing money wisely than knowledge and behaviour. Knowing what to do and actually doing it are two very different things.
Situations and structures can help us take care of our money. For example, one study from the National (US) Bureau of Economic Research found that by making retirement plans “opt-out” instead of “opt-in”, employees saved far more. When employees were automatically enrolled in their company’s retirement plan (even though they could choose to stop at any time), contribution rates rose from under 40% to almost 100%. In addition, this strategy was far more effective than simply educating people about the benefits of retirement plans. In another study, researchers found that while 100% of employees who attended a financial seminar planned to begin contributing to their company’s retirement plan, only 14% actually did. Seems like knowledge and behaviour aren’t enough for success with money.
What does this mean?
If we make things easy and mindless, they will happen. Automating is the least painful, most effective way to accumulate money. And, the added bonus; once you start seeing results, you will be motivated to continue and improve.
Here are a few ideas to automate your finances. Do them once (ok, maybe a few times), then get back to spending your time and effort on the things that really matter.
1) Savings– Set up an automatic transfer(s) of a certain amount from your chequing to your savings account (retirement, education or investment accounts) on payday. Don’t touch these accounts; link them to specific goals and let the money continue to grow. Tip– When your salary increases, adjust your automatic transfer(s) higher. You won’t miss money that you never had before.
2) Spending– Consider attaching regular bill payments to your preferred credit card. This allows you to reduce the number of bills to pay, better track your spending and maximize credit card rewards. Tip– Only do this if you pay off your credit card in full each month. Alternatively, set up automatic bill payments direct from your bank account each month.
3) Investing– Many financial institutions will set up an automatic, pre-determined investing plan consistent with your instructions. Prepare a plan up front, then put it on automatic pilot. Alternatively, if you own dividend paying stocks, consider signing up for dividend reinvestment plans. These plans automatically reinvest dividends paid to you in additional company shares.
4) Build a money calendar or checklist– Schedule important money deadlines like RRSP/RESP/TFSA contributions or tax instalments. Breakdown large or long term savings goals into manageable milestones throughout the year. For example, if you want to buy a house in 10 years, identify how much you need to save annually and monthly to make your goal realistic.
5) Establish a regular money meeting– Review progress towards your plan/goals and identify areas for improvement. Check in with your partner around money issues and make sure you’re on the same page. Identify possible bumps in the road and adjust accordingly.
The psychology of automation is critical to successfully getting control of your money.
If you have other ideas that have worked for you, I would love to hear about them.