Keeping meticulous records of your spending used to be a central tenet of budgeting. Some people even advocate something called the envelope method, which involves taking all of the money you make each month, creating envelopes for all of your expenses, and sorting out your cash flow physically to ensure all your bills are accounted for.
That may sound extreme, but consider the costs of getting it wrong. Black Americans spend more than double what white Americans spend on overdraft fees, according to a survey from Bankrate. Hispanic Americans pay roughly triple.
To avoid getting fleeced by fees while also working toward your financial goals, consider automation. Your electric bill and your student loan payments are likely on auto-pay, as automatic withdrawals are a convenient way to ensure your bills are paid on time. By setting up recurring withdrawals through your bank or employer, this principle can also ensure that emergency accounts, retirement accounts and even short-term goals like vacation or furniture funds are achieved in a timely way as well.
The benefits of a little automation and automation alone are hard to overstate. In 2006, a bill called the Pension Protection Act gave employers the option to enroll employees in retirement accounts automatically instead of requiring them to opt-in. Over ten years, retirement contributions soared 25%, just by making employees do a little extra work to opt-out. Let your own laziness guide you to financial success: The 20 minutes you spend automating your finances today could add up to thousands and thousands of dollars over a lifetime.
The problem with automation, obviously, is that it’s hands-off. To ensure the systems you set in place today still work for you in months or even years, you need to start by setting clear financial goals. Building an emergency fund? Are you saving up to move or buy a home? Once you have a clear picture of what you’re working toward, write down your monthly take-home pay and how much you’d like to set aside for each of those goals.
Say you earn $4,000 a month after taxes. Out of that money, you’d like to save $300 a month for retirement, $300 for a home, $200 for future car repairs, and another $100 for a vacation. That’s a total of $900 a month that you’ll be squirreling away.
Subtract that $900 from your $4,000 take-home pay. You’re left with $3,100 a month to spend on rent, utilities and living your life. No need to pore over receipts or track every expense with this method. You simply limit what’s available to spend and live within your means.
Now that you’ve plotted out your budget it’s time to put it into action. Divvy up your paycheck with direct deposits into your savings account, that way you are always paying yourself first. However before you go dumping everything into a boring old savings account, know that there are a couple of ways to slice this pie, some of which will help your money grow faster.
If you work at a company with an employer-sponsored retirement plan, the easiest way to take advantage of automation is enroll and have a percentage of your pay directed to that 401k account before taxes are taken out of your check. A good rule of thumb is to contribute at least enough to receive a matching contribution from the company. Your employer might offer a dollar-for-dollar match of up to 3 percent of your annual income, so to get the most out of that benefit you must also pony up 3 percent.
While any money you contribute above that 3 percent threshold will not be matched, directing more of your own dollars to the retirement plan is well advised. Some experts recommend saving up to 15 percent of your pay for retirement through a combination of employer-sponsored plans and individual retirement accounts, or IRAs. If you open an IRA through a brokerage house, you can set up a direct deposit of some of your take-home pay into the account.
Retirement accounts are rife with rules that make it difficult and expensive to tap that money, which is a good way to keep your hands off that cash. Because you have a few savings goals you will need a few accounts.
Traditional savings accounts are a good place to stash money that you may need for an unexpected emergency such as a car repair or medical bill. Online banks and credit unions typically offer some of the best interest rates on savings accounts.
"If we’re not helping all employees of color earn more, invest more and develop genuine autonomy, we’re not uplifting disenfranchised communities. The financial health of marginalized workers is critical to achieving equity and creating a productive and engaged workforce."
Founder of OfColor