The Easiest Way to Get Rich
Several years ago I read I Will Teach You To Be Rich. A key takeaway is that the easiest way to get rich is to automate your finances. This means setting up your paycheck so that it automatically goes into retirement savings, short-term savings, an emergency fund, and finally your checking account. By having all of these transactions take place automatically, it eliminates the need to decide everytime you’re paid exactly what you’ll do with your money.
Because here’s the thing.
Decision fatigue is REAL.
At the end of a long day, it’s difficult to eat brussel sprouts instead of donuts, to go for a run instead of vegging out on the couch. Constantly making decisions all day depletes our willpower to make the right decision. So we eat the donuts, we chill on the couch, we spend all our money.
The trick is to eliminate the need to make a decision.
This way, you don’t have to rely on willpower to make sure you meet your savings goals.
So how does this work?
The above graphic (photo credit: www.peterlazaroff.com) illustrates the ease of automating finances.
First, your retirement savings are taken out of your paycheck directly into your employer-sponsored plan. If you don’t have a 401(k) or 403(b), then consider a Roth IRA or IRA. (More on those later, but Betterment, Schwab, and Fidelity are all good options to set one up yourself.)
Second, your take-home pay is then deposited into your checking account. The day after my paycheck hits my account (for me, I get paid on a Friday so the transactions are all scheduled for the following Monday), several transactions take place:
- A deposit goes into each of four different accounts: Emergency Fund, Wedding Fund, Gifts, and Travel Fund. The last three are my short-term savings accounts. This is money I know I’ll spend throughout the year taking weekend trips or buying Christmas gifts. Setting aside money every paycheck means that I can afford these expenses as they arise, without going into credit card debt. I keep all my savings accounts at Ally Bank, which has excellent customer service and above-average interest rates
Third, all my monthly expenses automatically bill to my credit card. This includes car insurance, utilities, cable and internet, cell phone service, etc. I never have to worry about missing a payment and getting hit with a late fee, and I earn credit card points. About once a week I log in and pay my credit card.
Fourth, the remaining money is left in our checking account to pay the rest of our monthly bills (student loans, mortgages, truck payment). All of these bills are also set-up on autopay, both for a rate discount (student loans) and so that I never miss a payment.
However, the first time I set up this system, it didn’t work.
As you can see in the diagram above, the traditional advice on automating your finances assumes that your daily spending comes out of the same checking account that pays your other bills.
But. Sometimes it’s hard to remember you can’t spend all the money in your account because you’re student loans will be taken out in 4 days.
And I kept overspending out of my checking account. Sure, my bills were all being paid on time (and my savings were accumulating!), but I was unable to pay my credit card off at the end of the month. This lead to a cycle of having to dip into my savings to pay off my credit card. Not good for getting rich.
I figured out I needed to have a fifth transaction.
Now, I have a separate checking account (also at Ally), in which I deposit an allowance every paycheck (don’t worry, Mr. Graduate Investor has one as well!). Every paycheck I send money to my Ally checking account. I then use the debit card linked to this account for daily spending.
This money can be spent on anything I want. Manicures, random internet purchases, last-minute coffees and avocado toast. I know I can blow this money and still have the money in my checking account to cover all my automated bills and savings.
This separate checking account was nothing short of a game changer.
Since implementing the two checking account system I’ve said goodbye to credit card balances and been able to consistently save without needing to dip into savings. It’s also worked well for my relationship with Mr. Graduate Investor, because both of us can spend our allowances on anything we want without criticism or scrutiny from the other person.
What do you think? Do you find it hard to save money? Have you ever tried a separate checking account for money that’s just for spending?