I was once an epic overspender, but these days I’m constantly surprised by the positive balances in my automated accounts. I know automation works. I credit this system of money management with totally transforming my financial reality. Now that I know how it works, I share what I’ve learned with others through my online personal finance course, Your Rich Retirement Academy, where I walk my students through setting up their own account automation step by step.
Financial automation starts with a series of multiple accounts. Money flows automatically through recurring account-to-account transfers that you set up based on your own income, expenses, and goals.
Without fail, after a few months of letting automation work its magic, students send me grateful emails about how surprised they are that they have more than they thought. Some experience actually having enough money for the first time.
The coaching is simple, too. I recommend that my students set up a series of five or more accounts, only one of them with a debit card for spending. The other accounts are a combination of savings and checking accounts that are, quite literally, channels into which money will flow.
Here are the accounts I recommend, along with the verbatim names I ask my students to put on their accounts:
- Yesterday’s Promises: For existing monthly expenses: rent, cable, utilities, cell phone, and other recurring charges. This is a checking account, and if you choose to get a debit card for this account, it isn’t one you carry around with you. The amount of money that goes into this account represents your monthly overhead.
- Tomorrow’s Dreams: This is your retirement savings. If you don’t like the word “retirement” — this is your “economic independence” fund.
- All Things Auto: Assuming you drive a car, this is for maintenance, repairs, and for your next car. It’s always a better idea to not buy more car than you can afford to pay cash for.
- Other Savings Accounts: I have one for vacations and holiday gifts. You might have one for the kids’ college fund, a boat, your next computer, or whatever you’re saving up for.
- Curveball: I don’t like financial emergencies, so I don’t have an “emergency fund,” nor do I recommend my students have one. What I do suggest is a Curveball Account. It’s not just semantics; it’s really fundamental to how you create your financial life. At least a third of our spending occurs in lumps. That’s normal — not an emergency — so set aside funds for those opportunities.
- Today’s Fun: For anything else you want to spend your money on. The funds in this account are all yours to use at your discretion, but as soon as they’re gone, you have to make an agreement with yourself that you won’t “borrow” from any other accounts. In an ideal world, you calculate the Today’s Fun amount after you’ve decided how much goes into the other accounts. It’s what’s left over.
You can set up and fund these accounts to better manage your money now. The system also scales so you can effectively manage inheritances, raises, and the like. In this way, money can pool and then flow through these accounts to give you the experience of having enough.
To learn more about how I coach people through this process of automation, click here to download an infographic that shows you exactly how the flow of accounts works to help you manage your money like a pro. I'll also let you know when doors to Your Rich Retirement Academy open, and give you exclusive access to early bird discounts!
Hilary Hendershott is a member of the DailyWorth Connect program. Read more about the program here.