Most strategies for spending less involve some degree of shaming or a fist-pounding and stoic stance of extreme willpower. But in absence of a complete mental overhaul, what other strategies do we have? The robots, of course. Welcome to the power of automation, our new best friend.
We can rely on automation to “pay ourselves first,” setting up automatic contributions to savings, retirement, and taxable brokerage accounts. These systems offer powerful tactics for those who struggle with spending less. By automatically diverting funds to these accounts, the opportunity for frivolous or impulsive spending is removed.
The Limitations of Willpower and Motivation
Examine the two following goals:
1. I want to spend less money.
2. I want to save more money.
These are effectively the same goal. However, the goal to save more money (#2) is far more likely to succeed.
Why?
The first goal—to spend less—calls on our willpower and motivation. Will and motivation are often fleeting and in short supply. Willpower might get us to pack a bag lunch today, but will the motivation stick?
In personal finance at least, saving can require only a one-time action. If we increase our contribution by 1% to our 401(k) in 2021, we are automatically saving more from every single paycheck by default. And we won’t even notice the difference! Our one-time burst of motivation carries the compound growth of saving for decades to come.
Diverting funds in the hierarchy described in this post is a sure-fire way to save, which likely has the associated and closely linked effect of spending less.
…A raise does not help with saving; it can actually hurt.
Pay Yourself First
Imagine someone who is the fortunate beneficiary of a 5% raise. The temptation in western societies is to increase spending in stride, a process known as “lifestyle inflation.” As income increases, so do monthly bills, largely driven through higher spending on housing, food, and transportation.
In essence, a raise does not help with saving; it can actually hurt.
However, the savvy personal finance aficionado knows that a raise is an opportunity. Many folks get behind with their finances because of squandered opportunities. A raise should not only be considered an invitation to spend more money. Sure, we can reward ourselves in a reasonable way, but a raise should generally be recognized as one of many windows to buy freedom and secure it sooner. If saving is a goal, now is the time to increase that 401(k) by 5%, right? Now a raise really is helping you save!
But that doesn’t feel very sexy, does it?
Pay yourself first. And then wait.
How Much Does Our Life Cost?
The most fundamental building block of saving more money is understanding how much our life costs. We need to know what keeps the lights on, what is nice-but-not-necessary, and where we might have waste lurking in forgotten recesses of our recurring bills.
Unused gym memberships, TV services, or increasing insurance premiums sure sting when you have to record the payments every month. Seeing is believing.
Track spending for one to three months, and ideally forever. We use a simple spreadsheet. Mrs. CC created a beautiful template that is available for free for all email subscribers (Link below)
Decide on a level of comfortable spending that (a) keeps the lights on, and (b) allows for reasonable joy in life. We want that sweet spot between overly-frugal stoic austerity and frivolous indulgence.
(Related Post: Contentment: The Greenest Grass of Them All)
Ok, let’s begin working on what to do with any margin between money in and money out.
Define Goals for Saving Automation
Goals: The Short- to Medium-Term Saver:
Why are we trying to spend less to begin with? I hear from a number of readers who are saving for what I term the “adventure vehicles”: vans, slide-in campers, RVs, etc.
This sort of spending can obviously be a worthy expense – we have a camper—but notice how I’m using the word expense. These vehicles and accessories are in most cases depreciating assets and likely will only temporarily replace traditional housing costs, if at all. Be very careful to wisely consider an appropriate budget, and very ideally, avoid debt.
Here’s more: Van Life: The Economics and Trade-Offs
Other common short- to medium-term savings goals include home down-payments*, expensive weddings**, vacations***, and new cars in general****.
So, perhaps we are reframing some of our goals and asking the right questions about financial wellness. If we’ve chosen to continue with these future expenses, here is one suggestion for how to proceed:
My best suggestion on how to meet these savings goals is to open a Money Market or high-yield savings account. An employer can (in most cases) split paycheck direct deposits between a typical checking account and a preferred savings account. More on saving for a short (3-5 year) savings goal here.
Here again, we pay ourselves first.
*Before considering home ownership, consider the opportunity cost of home ownership. For what it’s worth, we are still happy home owners.
**CC pro-tip: If we did it all again, we’d have a shotgun wedding and then gather everyone for a “party.” “Weddings” are grossly expensive. “Parties” are cheaper. I hate to say it, but the American divorce rate is 50%. It’s a coin flip on whether any given couple will last, so save money and heartache by putting primary focus on the relationship and keeping the celebration fun, simple, and reasonable.
***There is no reason to pay full sticker price on travel. Here’s how we travel the world for pennies on the dollar.
****Do you prefer a new car? Here’s How to Get a Fantastic Deal on a New Car (from someone who did it twice in three months).
Goals: The Long-Term Saver:
Real and lasting savings are generated when we commit to a long game approach. With this mentality we can sustainably invest in appreciating assets that generate the wondrous and fantastic power of compound growth.
I mean, come on: who doesn’t like the sound of money making money? Actually, it generates no discernable sound, but it’s a really nice feeling.
In most cases, investing begins with an employer-sponsored retirement account. Let’s do this.
Retirement Plan Contributions
Automatic paycheck deductions are a sure-fire way to increase savings, and likely thereby decrease spending.
When an employer deducts earnings from an employee paycheck, savings are automatically generated by diverting funds to a retirement account, typically a 401(k) or 403(b). Unfortunately, many employees are tragically uneducated in the importance of a retirement plan.
Confused, embarrassed to ask questions, and unmotivated to research, I only allocated a small percentage of my earnings to a 401(k) for a number of years. After all, more money in a retirement account is less money in my pocket, right?! High amounts of retirement contributions felt lame and unnecessary in my 20s. I reasoned that I could catch up on retirement saving later, but gee whiz* was I wrong.
*According to Google, gee whiz is another way of saying gee. I found that humorous, and I hope you do too.
Automation: Increase Retirement Plan Contributions
An individual can contribute up to $19,500 to a 401(k) in 2021. If this kind of margin is available, set a contribution level to hit this target. In lieu of maxing out these accounts, strive to at least capture any employee match, which is FREE MONEY.
If you have been contributing to a 401(k), can you increase your 2021 contribution by even 1%? The difference is hardly noticeable in take-home pay, but the compounding effects for long-term financial health is smoked salmon for the soul.
These contributions are a one-time decision, relieving you of sustained willpower to save. Your desires are filled by your employer and automatically deducted from your paycheck. Solid.
Note: the self-employed and contractors can open a Solo 401(k). These nifty accounts, which enable much higher contribution limits, can also use the power of automation to automatically divert funds toward long-term saving ambitions.
Remember, all traditional retirement plan contributions are also tax-deductible. We can both save for a retirement and save thousands of dollars on taxes today. High five!
Automation: How Often Do I Pay Myself First?
The frequency by which we rely on automation wholly depends on our sources of income and savings goals. For instance, if we set up automatic contributions to an employer-sponsored retirement account, we should expect contributions each and every paycheck. That’s cool.
But if we follow the 2021 saving hierarchy, we eventually can get ourselves contributing to something like a brokerage account. During our wealth-building years, we used the power of automation to dollar-cost-average investments into our brokerage account on the first of every month.
Consistency, no matter the market conditions, are key to building wealth as a passive index fund investor. We can’t simply invest when we feel like the time is right. Put another way, the time is never wrong so long as we invest regularly.
How do we make sure we invest regularly? Automation.
Link a checking account, choose an amount that represents the margin between income and spending, and invest or otherwise save the rest. Choose a frequency (I’d recommend at least once monthly), and let the robots handle the rest.
For more on the methods, accounts, and asset allocation we’ve used to achieve financial freedom, check out these posts:
CC Family Investing Strategy, Part 1: Philosophy and Asset Allocation
CC Family Investing Strategy, Part 2: Where Exactly Is Our Money?
(Related Post: The Simple Systems to Kicking Monetary Ass)
Automation, Summarized
Sick of feeling exhausted or trying to have the willpower to save? The answer is simple: don’t give yourself the chance to spend too much. By bypassing our wallets and diverting funds to investing and savings accounts instead, we don’t even have the chance to blow our paycheck!
Follow these simple steps of automation, and you are on a fast-track to financial wellness.
Bottom Line: Use Automation to Spend Less by Saving More
Step 1: Track spending.
Decide on a suitable margin between money in and money out. Being honest with yourself, what can stay and what can go? The only money staying in our checking account is what’s needed for the necessities and an appropriate amount of discretionary spending each month. We’re not living like monks here, after all.
Step 2: Establish savings goals.
Are we saving for a near-term (and justifiably high value) purchase? Do we simply want to have a few months’ worth of living expenses? Are we simply interested in a realistic retirement? Do we want to retire early?
If saving for less than 3-5 years, use automation to direct deposit post-tax funds to a money market or high-yield savings account.
If saving for long-term ambitions (i.e., financial freedom), start with employer-sponsored retirement plans. Increase contributions, aiming to max out as many of these tax-advantaged accounts with pre-tax dollars as possible. From here, follow the steps outlined in this post.
Step 3: Invest in regular increments.
For brokerage accounts or other user-directed accounts funded with post-tax dollars, we relied on a dollar-cost-average approach to investing. We used automation to set a monthly contribution to invest primarily in a broad-based whole market stock index fund (our favorite is VTSAX). We invested every single month, no matter what. Consistency is key.
Step 4: Expect take-home pay to be lower.
Contributions to retirement and other accounts will limit the ability for us to spend too much, but that’s okay. Remember, we decided how much money we needed for necessities and discretionary spending, so don’t be disappointed. Remember, automation is doing the saving for us now. We are no longer relying on our willpower to do the heavy lifting.
Step 5: Forget about the noise.
The news will tell us that a recession is coming. Friends will buy nice things that might make us feel jealous. Don’t worry, the feeling from the flashy new stuff wears off, but financial independence never gets old. The robots know best. Let them work for you.
How do you rely on the power of automation to increase savings?
Remember, the best laid plans mean nothing if you can’t take action today. Have questions? Need some feedback? Hit us up on the contact page.
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