Accomplishing many of our goals requires our active participation; we need to work hard in order to see them come to fruition. There are many factors (tragedies, busyness, kids, etc.) that can arise in life that takes our attention away from goal accomplishment. However, when it comes to financial goals, automation can be your best friend. Essentially, automation allows you to remove your biggest obstacle, yourself, from reaching your financial goals because you don’t have to make the same decision over and over again to accomplish them.
What are some automation tips and tricks?
1) Automatic Savings Increase program within your 401(k) plan: this is one of the best features of a 401(k) plan and also one of the most underutilized. In essence, you set up your 401(k) to automatically increase your savings rate by a certain % each year.A popular method is to sync up this increase to happen whenever you get a raise. For instance, if you get a 3% raise every March 15th, you can set up your ASI to increase 1% every March 15th until you reach 20%. Year after year, you’ll end up saving more, but it won’t really feel like it since you’ll be keeping the majority of your raise.
2) Get out of debt (not including mortgage) then build up your post-debt emergency fund: anyone who’s ever interacted with Phillips Financial Advisors knows that we’re absolutely passionate about seeing people become debt free. Your income is your most powerful wealth building tool. After you attain debt freedom,automation can be a powerful tool in helping you establish your post-debt emergency fund. Many payroll departments allow you to split your paycheck direct deposit into more than one account.Doing this will allow you to automate the building up of your emergency fund which is your barrier to going back into debt in the future. Bear in mind, you want to make sure you establish your pre-debt free emergency fund of $1,000 before you begin your debt snowball. A recommended amount for your post-debt free emergency fund is 3-6 months of expenses.
3) Roth IRA contributions: the tax advantages of the Roth IRA cannot be understated; if you intend to invest for more than 5 years, a Roth IRA may be one of the best ways to go. Many people have the best intentions to max out their Roth IRA contributions every year, yet it never happens. Note that the Roth IRA contribution limits for 2019 were increased to $6,000/year plus another$1,000/year for the catch-up contribution for people age 50 and older. Filling out a simple Automatic Investment Program form allows you to set it and forget it. Even a $100/month in contributions can have a massive impact over 10+ years.
“Distributions from traditional employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.”