One of the keys to success in life is the ability to see the big picture. In other words, a successful person won’t miss the forest for the trees. The same is true for achieving success with personal finances. A person who frees himself from the mundane (e.g., going to the post office to mail out bill payments) can focus on the truly important issues (e.g., asset deployment, tax minimization, etc.).
Minimizing the Process
The key to freeing yourself from the mundane is to minimize the steps involved in maintaining your personal finances. Remove yourself from the process as much as possible, while leaving enough checks and balances to make sure things do not fall apart. Here’s what I do (and why):
1. Our paychecks are automatically deposited in our checking and retirement accounts. (This should be a no-brainer these days. Why force yourself to cash a check at the bank?)
2. Every pay period, I manually transfer a set amount into an account that we draw from to make our estimated tax payments. Instead of automating this step, I chose to do this manually so I could confirm that we both got paid the appropriate amount and make sure we are setting aside enough for taxes.
3. We pay ourselves first. We set up an automatic investment plan that automatically invests a set amount for us. We calculate the amount to invest at the beginning of the year based on our anticipated expenses.
4. We max out our retirement savings. I tell my employer to withhold the max for my 401(k) so all I have to do is make our annual IRA contributions.
5. All of our credit card spending is tracked online. I categorize our spending once a week to make sure we’re not going crazy and to make sure there is no unauthorized use of our credit cards. I also manually enter spending from our bank accounts (which is generally avoided as much as possible).
- We don’t track our bank/brokerage accounts online due to security concerns. It’s not as troubling to me if someone hacks into our online credit card accounts.
6. All bills are automatically paid from our credit cards (if possible), otherwise from our bank account. Again, the latter is avoided so we don’t have to manually track it.
7. Since 95% of our spending is on our credit cards, it’s like we have a funnel to collect all of our expenses into one payment. We automatically pay the entire balance of our credit cards each month from the direct deposit account.
- We keep a buffer in that account (part of our emergency fund) so we don’t have to worry about overdrafts. We also have overdraft protection that allows us to dip into another bank account for additional funds.
- We called our credit card companies and asked that they align our statement periods. Now all of our CC bills are paid at the same time, making them easier to track.
8. Once a month, I take a tally of our net worth. This manual step helps me make none of our accounts requires attention. For example, I make sure our automatic investments were executed properly. Seeing the net worth number also helps motivates us to keep our spending down. I also use this as an opportunity to decide whether we need to do any maintenance like re-balancing or tax loss harvesting.
That’s our system. For the most part, the mundane things like bill paying are automated. There are manual safeguards to prevent things from going awry. I’m also able to spend more time thinking about optimizing our financial picture.
Minimizing the Accounts
Another aspect of minimizing personal finances is to reduce the number of accounts/holdings to a minimum. When my wife and I got married, I drew a big Venn diagram listing my accounts, her accounts, and our accounts. I wanted our individual and combined finances to be as simple as possible.
Back then, I was sitting on a lot of cash. Even though the FDIC limit had been raised to $250K, I didn’t feel comfortable with more than $100K in a given account. So I had 4 bank accounts. I also had 2 brokerage accounts, 2 retirement accounts, and a health savings account — all of which were with different companies — and 4 credit cards. It was a real mess. It was quite a challenge tallying my net worth back then! She had quite a few accounts too, but not nearly as many as I had.
I consolidated my own accounts into as few accounts as possible. The bank accounts were easy to consolidate. The brokerage and retirement accounts took a little more work, forms, and fees. We decided to use these accounts for our joint accounts too. You can imagine this makes life much easier! Instead of 8 monthly statements to download (I didn’t even bother back then), now I only have a handful.
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I feel much more confident with my finances these days. I owe a large part of that to the baby steps we took to minimize our approach to our finances. Today, we have a tight and redundant system that all but runs itself!