I used to be a financial mess. Even though I was making a six-figure salary, I was living paycheck to paycheck. I racked up debt, scrambled to pay bills, and was clueless about investing.
Ironically, I was working at Intuit at the time — the 800lb gorilla of financial software that produces TurboTax, Mint, Quicken, and Quickbooks.
After avoiding it for months, one day I finally decided to set up my 401(k). I was suddenly faced with a bunch of questions I didn’t know the answer to: What asset allocation did I want? What funds should I choose? What’s my “risk tolerance”?
Perplexed, I visited my coworkers in their cubicles to ask their advice. In hushed tones, one after another said, “I don’t know…but let me know if you find out!”.
Woah. These other high-performing, well-educated grownups were as clueless as I was.
The student has become the master
I got to a point where the stress of not having my shit together outweighed the dread of getting my shit together. I made a New Year’s resolution to get my finances in order, and after having my head in the sand for so long I did a complete 180. I geeked out on everything personal finance: books, blogs, tv shows, podcasts, the works. After a while, I realized all the gurus were saying the same things in the same order. I call these The Three Essential Goals of Financial Health:
- Pay off your high-interest debt (think: credit card debt)
- Build a 3–6 month emergency fund (in case your car dies or you lose your job)
- Invest, prioritizing investments with tax benefits (you don’t want to work forever)
Easier said than done. How was I supposed to fund these goals if I was always running out of money in the first place?
I complained to my boyfriend at the time, who showed me his personal method for managing money: As soon as he got paid, he divided each paycheck into money for bills, spending, and savings goals. This made a ton of sense to me. Inspired by his paycheck organization and Ramit Sethi’s ideas on how to automate your finances, I developed a system I called, um, “The System”. It’s based on three fundamental principles:
Prorate your bills and savings goals per paycheck. Everything is easier to achieve if done bit by bit, on a regular basis.
Isolate your spending money from your bill and savings money. This allows you to know how much you can spend until payday without resorting to mental math.
Automate everything you can. Take the time to set up automated transfers, payments, and deposits. Then the money goes where it needs to before you can spend it.
After a little math and a lot of setup, everything was on auto-pilot: Every payday, my take-home pay was split up into money for bills, savings, debt, and investment and transferred where it needed to go. What was left in my checking account was my guilt-free spending money.
After a few years of The System humming away in the background, I was where I wanted to be. I had paid off my debt, built up a six-month emergency fund, and was maxing out both my 401(k) and my Roth IRA every year.
Sound good? I’ll show you how to do it.
A step-by-step guide to automate your finances
First, make a copy of this spreadsheet.
- Enter your take-home pay and how often you get paid.
- List your recurring monthly bills. These are bills that come once a month, so don’t include variable expenses like groceries and gas.
- List your annual expenses: things like taxes, car registrations, and Christmahanakwanzika presents.
- Unexpected expenses happen all the time, like mistakes (repairing a cracked iPhone) and splurges (buying a new iPhone). Decide how much you’d like to set aside for these. I do $75 per paycheck myself.
- Decide which Essential Goal you need to tackle.
• If you have high-interest debt (anything where the interest is 7% or greater), your goal is debt.
• If you’re debt-free but don’t have at least a 3 month emergency fund, your goal is an emergency fund.
• If you’re debt free and have at least a 3-month emergency fund, your goal is investment.
Enter the amount you’d like to put towards your goals. I do $200 per paycheck.
- Now that you’ve entered everything, check out “My Paycheck Plan” that has been calculated for you at the bottom of the spreadsheet. These are the numbers you’ll be using for the rest of the steps.
- Assuming you already have a checking account with direct deposit, open a second checking account. Yeah, it’s a drag to open another checking account, but the goal is to take your bill money out of your grubby little hands. This will be your “Bill Pay” account. Note: If you don’t already use direct deposit to automatically deposit your paycheck, make that happen. Ask your HR person about it.
- Now that the spreadsheet has prorated all your recurring monthly bills per-paycheck, set up a recurring transfer to move this money into to your new Bill Pay checking account every payday.
- Now comes the annoying part. Set up automatic payments so that your recurring monthly bills are now paid out of your new Bill Pay account. It’s a pain in the ass, but it’s going to make your life a lot easier in the future.
- Find a bank that allows you to have multiple savings accounts, also known as “sub-savings accounts”. CapitalOne360 does this, and it’s very helpful. No, they are not paying me, but that would be awesome if you’re listening, Capital One! Create a separate savings account for your annual expenses and set up recurring payday transfers like you did with your bills: transfer your car registration money into your Car Registration account, your tax money into your Tax savings account and so on. Mine looks like this (see screenshot below). Again — it’s a bit of work but I promise it’s going to make your life way better.
- Depending on which Essential Goal you chose in Step #5, set up your final recurring payday transfer.
• If it’s debt, transfer the money to your credit card or wherever it needs to go.
• If it’s an Emergency Fund, transfer the money to a savings account.
• If it’s investment, go to the next step.
- What investment vehicle?
• If your company has a 401(k) match, increase your contribution level to that percentage first — it’s free money, as everyone says. If you can’t get it all the way up there right now, inch it up the next time you get a raise.
• Assuming that after contributing to your 401(k) you can still afford to invest more, set up a Roth IRA if you qualify (here’s a handy flowchart you can use). If not, set up a Traditional IRA.
• If you already max out your IRA and you still have money to invest, go back to your 401(k) and put more money into that.
• If you can afford to max out both your IRA and your 401(k) and you still have money to invest, contribute to a taxable investment account.
- How to invest it?
• My advice is to put everything into an age-appropriate Target Date Fund, also known as a Target Retirement Fund or a Lifecycle Fund. Why? It’s pretty much maintenance-free: it adjusts your risk exposure as you age and you won’t have to rebalance it every year.
• What brokerage house? I’d follow Warren Buffet and invest at Vanguard. No, they are not paying me, but that would be awesome if you’re listening, Vanguard!
Once you’ve set this up, here’s what’s going to happen. On payday, the money for your bills, annual expenses, and Essential Goal will be transferred out of your checking account.
What’s left in your primary checking account is your Guilt-Free Spending Money. That, of course, means you can spend this money without worry! You don’t have to do mental math anymore to figure out what is safe to spend. All the money left in checking is for you to spend on variable expenses (like groceries and gas) and anything else your little heart desires, like clothes, movies, and collectible Garfield ephemera.
When your bills are due or annual expenses are approaching, you will have the money to pay them. Your debt will shrink. Your savings or investments will grow. And when you decide to try Cristal or your pet rabbit gets GI stasis, you’ll have the savings you need to pay for it.
This is a fair amount of effort, but you can do it! If you need any help, send me an email. Good luck!
Matty Sallin is the CEO & Founder of System Financial