In Ramit Sethi’s best-selling book I Will Teach You to Be Rich, Week 5 is a game-changer. It’s the week where you shift from thinking about money to making it work for you—automatically. This week is all about automating your finances, a strategy that can save you time, reduce stress, and ensure that you hit your financial goals without even trying. Imagine setting up a system that makes sure your bills are paid on time, your savings grow, and your investments build wealth—all while you sleep. Sounds too good to be true? It’s not. Let’s dive into how you can make this happen.
Why Automate Your Finances?
Before we jump into the how, let’s talk about the why. Automation is one of the core principles of a rich life, according to Ramit Sethi. By automating your finances, you’re ensuring that your money is consistently working towards your goals without requiring your daily attention. Think about it: how many times have you forgotten to pay a bill, only to be hit with a late fee? Or how often do you plan to save money but end up spending it instead? Automation takes human error out of the equation. It’s like having a personal financial assistant who never sleeps, never forgets, and never makes mistakes.
The Power of Consistency
Automation is powerful because it creates consistency. It ensures that every month, money is flowing to where it needs to go—whether that’s your savings account, investment portfolio, or bill payments. This consistency is crucial because it builds financial momentum. Over time, these small, regular actions compound into significant results. Imagine automatically investing $500 a month in a diversified portfolio. Over 10 years, with compound interest, that small action could grow into a substantial sum. And the best part? You didn’t have to lift a finger.
Step 1: Automate Your Bill Payments
Let’s start with the basics: automating your bill payments. This step is crucial because it ensures that your essential expenses are always covered. No more late fees, no more stress about missing a payment. Here’s how you can set it up:
List All Your Recurring Bills
The first step is to list all your recurring bills. This includes:
- Rent or mortgage payments
- Utility bills (electricity, water, gas)
- Internet and phone bills
- Credit card payments
- Student loan payments
- Insurance premiums (health, car, home)
Having a clear list helps you see the full picture of your fixed expenses. It’s also a good idea to include any subscriptions you have, like streaming services or gym memberships.
Choose the Right Accounts for Payments
Once you’ve listed your bills, decide which account to use for each payment. For most people, it makes sense to use your checking account. However, if your credit card offers rewards like cashback or travel points, you might want to pay certain bills with your credit card and then automate paying off the card in full each month. This way, you’re not only staying on top of your bills but also earning rewards.
Set Up Automatic Payments
Now that you’ve identified your bills and chosen your payment method, it’s time to set up the automation. Most banks and service providers offer an auto-pay option. Simply log in to your bank’s online portal or the service provider’s website, and follow the steps to set up automatic payments. Make sure to align the payment dates with your paychecks to ensure there’s always enough money in your account when the payment is due.
Example: Automating Rent Payments
Let’s say you pay $1,200 in rent every month. Instead of writing a check or manually transferring the money each month, you set up an automatic transfer from your checking account to your landlord’s account on the first of every month. This ensures your rent is always paid on time, and you never have to worry about late fees. Plus, it frees up mental space—you don’t have to remember to make the payment.
Step 2: Automate Your Savings
Once your bills are covered, the next step is to automate your savings. Ramit emphasizes the importance of paying yourself first. This means that before you spend money on anything else, you allocate a portion of your income to savings. This strategy is key to building wealth over time.
Determine Your Savings Goals
Start by determining your savings goals. Do you want to build an emergency fund? Save for a vacation? Buy a home? Having clear goals will help you decide how much to save each month. Ramit recommends saving for multiple goals simultaneously, rather than focusing on just one. This way, you’re making progress on all your priorities.
Example: Saving for Multiple Goals
Let’s say you have three savings goals: building a $10,000 emergency fund, saving $5,000 for a vacation, and saving $20,000 for a home down payment. You decide to allocate $500 a month to savings. You could divide it like this:
- $250 to your emergency fund
- $150 to your vacation fund
- $100 to your down payment fund
By automating these transfers, you’re consistently working towards all three goals without having to think about it.
Automate Transfers to Savings Accounts
Now that you’ve set your goals and determined how much to save, it’s time to automate the process. Most banks allow you to set up automatic transfers from your checking account to your savings accounts. Set these transfers to occur shortly after your paycheck is deposited, so the money is saved before you have a chance to spend it.
Step 3: Automate Your Investments
Savings are essential, but if you want to build wealth, you need to invest. The good news is, you can automate your investments too. Whether you’re contributing to a 401(k), IRA, or a taxable brokerage account, automation makes investing easy and consistent.
Example: Automating 401(k) Contributions
Let’s say your employer offers a 401(k) plan with a company match. If you contribute 6% of your salary, they’ll match it. This is free money, so you want to take full advantage of it. By setting up automatic contributions, a percentage of your paycheck is invested in your 401(k) every pay period. This not only ensures that you’re consistently investing but also that you’re maximizing your employer’s match.
Set Up Automatic Contributions
To automate your investments, start by setting up automatic contributions to your 401(k), IRA, or brokerage account. For a 401(k), you can usually do this through your employer’s payroll system. For an IRA or brokerage account, log in to your investment platform and set up recurring contributions. Decide on an amount or percentage of your income that you want to invest and choose the frequency—most people opt for monthly contributions.
Automate Reinvesting Dividends
If your investments pay dividends, you can also automate the reinvestment of those dividends. This means that instead of receiving cash payments, the dividends are automatically used to purchase more shares of the investment. Over time, this can significantly boost your returns through the power of compounding.
Step 4: Create a Conscious Spending Plan
With your bills, savings, and investments automated, the next step is to create a Conscious Spending Plan. This is where you decide how to allocate the money that’s left over after you’ve covered your essentials and paid yourself first. Ramit’s approach is all about guilt-free spending on the things you love, as long as you’ve taken care of your financial priorities.
Determine Your Spending Categories
To create your Conscious Spending Plan, start by determining your spending categories. Ramit suggests dividing your spending into four categories:
- Fixed Costs: This includes rent, utilities, groceries, and other necessary expenses.
- Investments: This includes your automated contributions to retirement accounts and other investments.
- Savings: This includes your automated savings for goals like an emergency fund, vacations, or a home down payment.
- Guilt-Free Spending: This is the money you can spend on whatever you want—dining out, shopping, entertainment—without feeling guilty.
Example: Allocating Your Income
Let’s say your monthly take-home pay is $4,000. Here’s how you might allocate it:
- Fixed Costs: $2,000 (50%)
- Investments: $800 (20%)
- Savings: $600 (15%)
- Guilt-Free Spending: $600 (15%)
This allocation ensures that you’re covering your essentials, investing for the future, saving for goals, and still enjoying life. The key is to automate the first three categories so that you know exactly how much you have left for guilt-free spending.
Step 5: Monitor and Adjust Your Automation
Once you’ve set up your automated financial system, it’s important to monitor and adjust it over time. Life changes—your income may increase, your expenses may decrease, or your goals may shift. Regularly reviewing your automation ensures that your system continues to work for you as your life evolves.
Review Your Automation Quarterly
Ramit recommends reviewing your automated system quarterly. This doesn’t mean you need to overhaul everything every three months, but it’s a good idea to check in and make sure everything is running smoothly. Are your bills being paid on time? Are you meeting your savings and investment goals? If not, you may need to tweak your automation.
Adjust for Changes in Income or Expenses
If your income increases—say, you get a raise—you can adjust your automation to save and invest more. Conversely, if your expenses decrease—maybe you’ve paid off a loan—you can redirect that money to other goals. The beauty of automation is that once you set it up, making adjustments is simple.
Example: Adjusting for a Raise
Let’s say you get a $500 raise. Instead of increasing your spending, you decide to allocate that extra money to your savings and investments. You could increase your 401(k) contribution by $200, boost your emergency fund savings by $200, and add $100 to your vacation fund. By automating these increases, you’re ensuring that your raise is working towards your financial goals without requiring extra effort on your part.
Final Thoughts: Automation Is the Key to a Rich Life
Week 5 of I Will Teach You to Be Rich is all about taking control of your finances by letting go. By automating your bills, savings, and investments, you’re creating a financial system that works for you 24/7. This system not only ensures that you’re consistently meeting your financial goals but also frees up your time and mental energy to focus on what really matters—living your rich life.
Remember, the goal of automation isn’t just to save time. It’s to create a system that aligns your money with your values and goals, so you can spend less time worrying about money and more time enjoying life. Whether you’re saving for a big goal, investing for the future, or just making sure your bills are paid on time, automation is the key to making it happen effortlessly. So, take action today, set up your automated financial system, and watch as your money starts working for you—automatically.