The Power of Automation
I like simplicity. There is beauty in simplicity. One of the most satisfying parts about my job is helping clients find solutions to their biggest financial concerns that are incredibly easy to implement while still accomplishing what they need. There is a sense of security and confidence in being able to easily explain why you are making the financial choices you are making even if you aren’t a financial expert. There is freedom in not having daily or weekly to-do items. There is comfort in knowing your taxes may be simple because you don’t have unnecessarily complicated financial strategies being used.
I meet and hear from many people who believe that having success in personal finance is complicated. It might be a conscious decision, or it might be subconscious, but a lot of them seem to be attracted to complexity. The complication of their financial strategy makes them feel sophisticated and responsible. I get why they feel this way. I believe some of this feeling comes from how rare it seems to be to find people who are financially independent and pleased with the state of their financial affairs. Therefore, it is reasonable to assume that reaching these points of financial well-being must be complicated. I believe the opposite is true.
I think the best example of simplicity in action is automatic savings. I know, how boring. But I meet many people not doing it. It is critically important to not rely on yourself to have to make weekly or monthly decisions about how much you should save.
Short term (less than five years from now) large expenses are the easiest to plan for. I typically recommend using a high-interest online savings account to organize your various goals. Then do the math to automatically save enough each month to reach your goal in the desired timeframe. For example, if you want to have a 20% down payment ready to go three years from now you can create an account named House Down Payment, estimate the price of house you want to buy, multiply that by 20%, and divide by 36. Then commit to automatically saving that amount each month. Good online savings accounts are free and should be paying almost 2% in interest (as of December 2018). Online banking allows you to separate your savings goals (house down payment, vacation, car, emergency reserve, home renovation, etc) easily so the money isn’t comingled in one account.
Many of you reading this are physicians in residency or fellowship. I know it can be tough to save during this period, especially if you’re a single income house. However, there are still opportunities to increase your automatic savings, and remember, the savings can be used for fun things like extended travel at the end of training. Each summer during training residents receive a post-graduate year salary increase. Take the July paycheck and subtract from it the June paycheck of the prior year to determine what the after-tax increase was. If it’s $130/mo, increase your automatic savings (or high-interest debt payment if you have any) by $130. Keep in mind that while saving seems boring, I wouldn’t think of it as a choice of spending vs saving. It’s a choice of spending now vs spending later, and the spending you choose later is often much more mindful, more accurately based on your values, and usually more fun.
Automation works for debt repayment as well. Automating the minimum monthly payment is easy and most people do this, often with the thought to pay more “when they can.” Don’t do that. Commit to paying extra against the credit card balance or the loan now and automate. I’ve never met someone who was upset when they made their final loan payment.
If you aren’t using automation, I encourage you to give it a try. If you are automating, ask yourself if you could push yourself to increase the monthly automatic payments toward your debts or your savings.