Rather than prepare a list of financial goals, something that would certainly be daunting once compiled, I've chosen to instead craft a solid financial plan ahead of 2014, with a goal of sticking with it for 2014.
This is certainly a form of mental trickery, and I freely admit that. Most effective personal finance tools are simply mind hacks, or new ways to think about everyday things. In fact, my overall philosophy on money rejects many “accepted” conventional thinking, such as the idea that you need millions to retire, that you must work until 70 before you can retire, that you must fully pay for your children's college education, etc. By breaking free of these ideas, you are free to write your own financial story.
Back to my plan. I consider this a mind hack because rather than trying to follow a monthly list of goals, I'll just need to follow one plan. And by creating and phasing in its implementation in November and December of 2013, my plan will be fully automated by the end of January, meaning if all goes well, the only thing I'll need to do to sustain it and hit my subgoals is to stay employed and keep a steady paycheck.
STEP ONE: Formulate the Plan
The end of the year, or its approach, is a good time to re-evaluate your goals and your overall plan. For some, you may have experienced a life event that impacts your money, such as a new job, job loss, moving, new baby, new home or the sale of one, raises, demotions, promotions, inheritances, and the list goes on.
2013 brought many changes to our lives, including a new job for me, a hefty pay raise, moving 200 miles, my wife taking at least a year off work, selling our house and downsizing to a rental, selling one car to become a one-car family. I also had some nice accomplishments, like saving $20,000 in a cash warchest (emergency fund), opening a Roth IRA, implementing tax reduction strategies through FSAs and of course, maintaining true debt freedom.
To start formulating your new plan, think about and write down your goals. For some, it could be total debt payoff (consumer debt). For others, it could be to increase your overall savings rate. Maybe you want to save monthly for your child's education, or for large planned expenses.
Here's my list of money goals for 2014:
- Stay out of debt
- Max out two Roth IRAs
- Fully automate my bill payments, savings and investing
- Save monthly for planned expenses (right now it's another European vacation and braces for our 8 year old)
- Save at least 25% of take-home pay
- Continue with my Health Care FSA and Public Transportation Commuter expenses being deducted pre-tax from my check for big savings
For 2014, I'm focusing on simplifying my financial strategy by automating as much as possible, which appears to be almost everything. This strategy was of course made popular by Ramit Sethi in I Will Teach You to be Rich. Income will come into my main checking account, like an email inbox. Small utility payments like gas, electricity, internet, car and renters insurance, Netflix and Hulu Plus, will be autopayed to a rewards credit card that will be fully paid off each month automatically, while large transactions such as rent and the credit card payoff will be autopayed from my checking account. Additionally, $500 will be automatically invested two times each month in Roth IRAs. My SmartyPig account will also pull a lump sum once monthly, and allocate it to our European Vacation and Braces Fund as specified, earning me 1% interest in the process.
If all goes as planned, I'll never have to manually pay a recurring bill again, or remember to save or invest.
STEP TWO: Begin Implementation with Phase 1
Since we are starting in December, and because I'm getting a raise starting with my mid-December paycheck, I won't fully know my financial picture until a couple pay periods into 2014, so I'm going to phase in the implementation of this plan. Fully automating my payments is a big step for me, because I am used to constantly thinking about them and worrying about them, and used to enjoy the feeling of paying down debt.
I started implementation with the low-hanging fruit, something I could accomplish in an hour – automating my smaller recurring payments. Taking a look at those and their average monthly amounts due, we have:
- Cell phones (2 lines): $150
- Car Insurance: $50
- Renters Insurance: $14
- Gas: $30
- Electricity: $85
- Internet: $47
So I set out to make this happen, almost surprised that it has took me this long to decide to do it. By autopaying them to credit cards, not only do I not have to remember to make the payments, I don't have to worry that a miscalculation will overdraft my bank account.
I quickly set up autopays for my car and renter's insurance, as well as my cell phone with ATandT. Keep in mind that setting these up will likely require you to visit your online accounts for each of these services directly, because you bank's autopay may only allow you to set a single monthly payment amount, which could hurt you if your bill has an add-on fee that month and you underpay. By setting it up through your provider, you will ensure that the correct amount due each month is paid.
It may take a bit longer to set this up for those accounts you never visit, such as internet and electricity. It took me 15 minutes and an online chat session to figure out how to log into my Comcast account. With gas and electricity left to go, I'm crossing my fingers that I can set up autopay online, especially since I left my bill statements at the office, which I won't visit for about 9 days due to the Thanksgiving holiday.
Once Phase 1 is complete, I'm taking the amount of bills payments due each month from nine down to 3, meaning fewer chances to forget to make a payment and incur a late fee.
STEP 3: Implement Phase 2 of Plan
Phase Two involves automating my large monthly rent payment, the water bill that goes to the same payee, and my monthly credit card bill. This will bring me to full automation of expenses. My small bills and utilities are autopayed by my credit card, which will now be autopayed by my checking account that receives my paychecks.
Again, the reason I am implementing this plan in Phases is because I feel that it is generally smart to ease into big changes like this, and because Christmas and its tendency to gutpunch the best laid of plans, and because I want to make sure this works on a small scale before full implementation.
STEP 4: Full Implementation
Partial implementation so far has included formulating the plan, autopaying small recurring expenses like utilities, and then autopaying the rent and credit card. The next step is to automate my saving and investment.
You will remember that my overall goal is to simplify my finances, and my definition of simple is one that is completely on autopilot. As I said before, accomplishing my financial goals will now only require that I keep my job and paycheck.
Fortunately for me, implementing Step 3 will be easier than Step 2 because I already autosave each month with SmartyPig, and I have a token amount ($100/month) going to a brokerage account with Prudential. If the coast is clear, I will set up two monthly pulls to my Vanguard Roth IRA, $500/each.
After full automation, all that will be left to pay is my bi-monthly life insurance premium, but that can also be dealt with by biting the bullet and paying the full year's premium in one swoop.
This will complete my plan and fulfill my goals, and whatever money is left over will be free to play with.