Yellowstone Financial, Inc.

Automate Your March to Financial Independence

While there’s much a qualified financial planner can do to map out a course to achieve your goals, much of the responsibility falls on you.   You’ve heard it before: spend less than you earn.  Do this long enough, make smart choices, and with a little good fortune you will make work optional for you.

Spending less than you earn over your working life sounds easy, but in practice it’s a challenge for many.  The key is to automate activities that contribute to your wealth, and to slow down those practices that undermine your financial strength.  Here are some of the most impactful strategies.

Automate retirement plan contributions.  This should be an easy one for you and probably one you already use.  Most so-called defined contribution retirement plans including 401(k) and 403(b) plans allow for $18,000 a year in contributions plus the employer match, with those 50 and over able to contribute $6,000 more.

If you don’t have the cash flow to put aside the maximum and still pay your bills, look at saving 15 percent of your pay (if that’s less than the maximum).  Can’t do that with your budget?  Then save enough to maximize the employer match in your plan, if there is one.  Then each time you have a raise or cost of living adjustment, bump up the savings rate into the plan.

If you’re fortunate enough to be well-paid and work for a public or non-profit entity such as CU or the Boulder Valley School District, you may be eligible to contribute an additional $18,000 a year ($24,000 if 50 or over) into a 457 plan.

Regular retirement plan contributions are doubly virtuous in that you are setting aside funds for financial independence and limiting annual expenses through saving much of your income.  By keeping spending low, you lower the amount you need to save to achieve your retirement goal.  If you’re living on $8,000 a month as a family instead of $10,000, then you have reduced by 20 percent the amount you need to save for retirement if you plan to maintain the same standard of living.

Other regular savings opportunities.  If you have additional funds after maximizing retirement plan savings, make regular contributions to a taxable investment account.  With mutual fund companies such as Vanguard and brokerage firms such as Charles Schwab, you can set up regular transfers from your bank account into investments that are held outside of a retirement plan.  While you don’t get an upfront tax deduction as with retirement accounts, you have more flexibility to use the funds before traditional retirement age and enjoy advantageous tax treatment if invested properly.   If you qualify for Roth IRA contributions, you should maximize those before contributing to a taxable investment account.

Slow down the automated spending.   While we want to make savings as easy as possible, it’s helpful to be able to put the brake on spending.  Most of our service providers have auto-pay options and banks have online bill pay.  They are wonderfully convenient features and it’s hard to imagine how we managed our finances without them.  But if you want to reduce your spending, opt for a paper bill from your cable and internet, mobile phone, and most importantly your credit card providers.  Cable and internet providers can impose new fees at any time and previously negotiated discounts can expire.  Mobile phone companies can change the terms of your plan and you may be paying fees on data use that you don’t realize.  It’s astonishing the number of people that have their credit cards on auto-pay and never take the time to review the charges.  Make sure you look at your bill every month, determine if the charges are legitimate, and then consider whether your spending (which is made easier through credit cards) is in line with your values.

If you can automate financial virtue and slow down financial vice, you will achieve your goals sooner than you could imagine.