- Keep 2 months run-rate savings in your checking account and 4 months in your savings account
- Automatically contribute to your 401(k) with each paycheck and at minimum contribute how much your employer matches (if any)
- Setup automatic wire-transfer to Wealthfront (or another automated investor) for at least 25%+ of your bi-weekly paycheck
- Put all recurring bills on auto-bill pay and on your credit card if possible
- Always max out ($5,500 for 2016 ) your Roth IRA or IRA contributions at the beginning of every year
So let’s take a look at the design and we’ll review each component after.
Below I've provided some additional nuances for each section:
1. Salary: Link your checking account to your company. To ease the maintenance of your account, I recommend only linking a single checking account to reduce the number of different accounts that you have to check.
2. 401(k): Most employers offer 401(k) plans and some employers offer 401(k) matching. If your company offers matching on a 401(k) plan, you should always contribute the maximum of your employers matching. For example if your employer offers matching on a 1 : 1 basis up to 3% of your salary, always contribute at least 3% so you aren’t missing out on that additional compensation!
3. Checking Account: I recommend having your checking account with a credit union vs a bank, mainly because credit unions are not-for-profit and typically have better customer service and rates and fees. I personal recommend Alliant but in most areas there are great local credit unions as well.
As noted in the diagram, I recommend always keeping 2 months reserve in your checking account. Having this reserve will help ensure that you never have an overdraft and will bring you a significant amount of peace of mind when random expenses pop up.
4. Automated Investing: If you’re unfamiliar with what automated investing is you should make sure to read my other post ‘How do I actually invest’. In short, automated investing is where a software takes your personal risk tolerance (based off questions you answer) and builds you a diversified investment portfolio based of that risk tolerance and maintains it for you as well. I personally prefer Wealthfront (you can get your first $15,000 managed free by using this code), but there are a number of other great provides such as Betterment and Vanguard Personal Advisors.
Once you’ve selected your automated investor, you can setup an automatic transfer between your checking and the firm. At a minimum you should be transferring at least 25% of your paycheck each month into the automated investing account. If you can invest more, do it! The benefit of automated investing is that you can basically set it and forget it and it will keep growing for years and decades to come.
5. Credit Card: All too often you hear about people having 10+ cards and getting all sorts of deals and discounts because of those cards. However, having a lot of cards is very difficult to manage and often results in missed payments and rarely provides much additional benefit. I recommend only having 2 credit cards. With 2 cards you can have one primary card for most of your purchases and use the other in unique instances where the rewards are higher than your primary one. I'd recommend the Chase Freedom Unlimited and the Discover It Cashback Match as a good primary card. The biggest thing to remember though about credit cards is to always ALWAYS pay your bills in full every pay period, no amount of rewards points will make up for the high interest rate they charge you!
Once you have your primary credit card you should link auto-bill pay to it from all of your recurring charges, such as gyms, power and gas, and cable and internet packages bills. This way you never have to worry about missing a payment and you earn cashback and rewards by using your credit card.
6. Savings Account: As I mentioned in the checking account section, I really recommend doing your banking through a credit union, preferably through the same credit union as your checking account so you can transfer very quickly in between them when needed. You should always try to keep at least 4 months spending (not much more though!) in your savings account so you are able to pay for any unforeseen expenses but still earn a small return on your savings.
7. Roth IRA: Depending on your income you may not be able to contribute to a Roth IRA, but if you’re able to, you certainly should. Roth IRA’s are not taxed when you put money into them and are only taxed when you take money out. No matter if you have a Roth IRA or just a general IRA, I always recommend maxing out your contributions to lower your tax bill. For 2016, you could contribute $5,550 if you’re under 50 and $6,500 if you’re 50 or older. I recommend maxing out your IRA with one deposit at the beginning of every year so you don’t have to think about it again until the next year!
Days of the month:
- 1st – First paycheck deposited in checking account and 401(k)
- 5th – 25%+ of the first paycheck wired to Wealthfront (or other automated investor)
- 10th – Auto bill-pay for credit card and other bills
- 15th – Second paycheck deposited in checking account and 401(k)
- 20th – 25%+ of the second paycheck wired to Wealthfront (or other automated investor)
Let me know if you have any questions in the comments below and enjoy never needing to think about your saving and investing strategy again!