When I started my career, I used to receive a paper paycheck every Friday. Can you believe that? Paper. For real. Another job paid me monthly. Again, I received a special piece of paper, but once a month. I then had to take this to a bank. Prior to ATMs I had to wait in line and hand the check over to a teller. All the money was then deposited into one account. Any division of purpose for those dollars were in my head only. I could write a check and deposit that into savings if I wanted to save up for something.
Then came direct deposit. At first, I didn’t like it at all. It wasn’t clear how much I was paid or when it was in my account. Then I got used to it. Now I see it as a magical key to my success. If only I took full advantage of this tool my whole career. It isn’t too late for you to exploit this tool.
How do you benefit? How does direct deposit contribute to your wealth? The key is what I’m calling Pay Yourself Last.
Determine your monthly financial needs.
- This includes your rent or mortgage, utilities, food bill, transportation, etc.
Determine your monthly financial wants.
- This includes entertainment, travel, etc.
Determine your periodic expenses.
- Keep these in a separate checking account. These include property taxes, disability insurance payments, home owner’s association dues etc.
- Since these are not monthly, they can derail your primary checking account value.
Set up the maximum contributions to any retirement accounts (401K, 403b, 457b, etc.).
- Make these an automatic withdrawal. For example, if you contribute $18/ year to your 401K and are paid biweekly $692 per pay will be transferred into your mutual fund investments.
Add up any other savings or contributions.
- Will there be unusual expenses? A long vacation? Extraordinary health expenses?
- You may choose to fund your 529 and IRA accounts once a year in January. Set that money aside.
Set up automatic direct deposit instructions.
- Your “stipend” will go to checking account A. That is the money you will live off. It will get back down to almost zero just before the next paycheck comes in.
- Your periodic payment will come into checking account B. When your semi-annual dues come, you will pay them out of this fund.
- All the rest will be sent to your investment account. This amount will vary markedly depending on time of year, bonuses, social security income cap, raises, etc. You will end up contributing more to investment accounts and earlier than any other system I am aware of. Make sure this amount will be at least 20% of your income. For me it is usually more like 33% of gross (or 50%) of net income. I don’t miss it, since I never “see” it.
- Let your wealth grow automatically.
Have you done something similar? Are you guaranteed to save, invest, and grow wealth?