How To Automate Your Financial Life

Summary/TL;DR

Through a series of four bank accounts (one for income, and three for specific expense categories) and two credit cards, I have developed a system which makes handling my cash flow at home as mindless as contributing to a 401(k). Twice per month, funds are transferred from the income account into the three bank accounts in amounts dictated by my budget. The bank accounts are used to pay off the credit cards once per month, and expenses are tracked using a budgeting software.

Introduction

A budget is just numbers on paper unless you have a system in place that puts it into action and ensures compliance. By far the most important steps to take in order to increase the likelihood of complying with your budget is a simple and automated cash flow system – a system that makes budgeting as easy and mindless as contributing to your 401(k).

In today’s post, I’ll describe how I put my personal financial life on autopilot.

The System At A High Level

My cash flow system works alongside my budgeting system described in this post. Every expense I have is tagged as either “Recurring – Fixed”, “Recurring – Variable”, or “Irregular”. Here’s a description of what each tag means:

• Recurring – Fixed: These expenses recur at regular intervals (weekly, monthly, quarterly, etc) and are a fixed amount every month. Common examples include debt payments, insurance premiums, and subscription services.

• Recurring – Variable: These expenses recur at regular intervals (or at predictable intervals), but are not fixed in amount. Common examples include groceries, dining out, and utility bills.

• Irregular: These expenses do not recur at regular intervals, but are nonetheless incurred (or are likely to be incurred) at some point. Common examples include home and car maintenance, travel, and gifts. Failure to include irregular expenses in a budget are usually the primary reason that they fail.

Once everything is tagged, I add up the totals in each category and use a series of bank accounts with automatic transfers to implement my system. Specifically, my cash flow system involves four checking accounts and two credit cards:

• Income Account: This account receives all income and is distributed to the other three as my budget requires. I keep a $1,000 buffer in this account.

• Fixed Expenses: This account receives all funds from the Income account that are dedicated to expenses in the “Recurring – Fixed” category. Most expenses are scheduled to draft automatically from this account. The rest are put on a credit card that gets paid off monthly from this account. I keep a $3,000 buffer in this account.

• Variable Expenses: This account receives all funds from the Income account dedicated to expenses in the “Recurring – Variable” category. These expenses are put on a credit card (separate from the one mentioned above) that is paid off every month from this account. I keep a $1,000 buffer in this account.

• Irregular Expenses: This account receives all funds from the Income account dedicated to expenses in the “Irregular” category. As these expenses are incurred, they are put on the credit card attached to the “Variable Expenses” account, and funds are transferred from the Irregular Expenses account into the “Variable Expenses” account so the card can be paid off. I keep a $1,000 buffer in this account.

Twice per month (on the 15th and 30th/31st), I schedule transfers from the Income account into each of the three checking accounts listed above based on how much my budget dictates they need. I prefer semi-monthly transfers because they align with when cash flow hits the Income account, meaning that I don’t have to worry about any of the transfers failing due to insufficient funds.

All Variable and Irregular Expenses are tracked in a budget software once per week (Fixed Expenses, by their nature, do not need to be tracked). At the beginning of the month, I look at how much I spent in the Irregular category and transfer it to the Variable account so it has enough to pay off the credit card. Any savings is also automatically scheduled to transfer from the Income account once or twice per month.

A Hypothetical Example

Here’s what my system might look like for a young couple with children (click on the picture below to make it larger):

Based on this budget, the semi-monthly cash flows to their accounts would look like this:

Since Jim and Pam’s employers match 5% of contributions to their 401(k) and Jim and Pam are both contributing up to the match, they are already at a 10% savings level. Since their 401(k) contributions are deducted from their paychecks, it is not displayed in the diagram above, which only shows the funds hitting their bank accounts. While additional savings would be ideal in their case, they have debt in the form of student loans and car notes that should be prioritized first. Once these are paid off, their monthly cash flow surplus will be about $1,900! This could be used to hit a savings target of 20% and increase spending in other areas.

As mentioned above, a budget is just numbers on a paper until it is implemented with a cash flow system. And a good cash flow system will, as well as it can, eliminate or marginalize common reasons for which your budget might “fail”.