Bulletproof Spending and Savings: Never budget again. Build wealth automatically.

I’ve been using a personal finance system for years now that allows me to know exactly how much I spend (and on what), pay all of my bills on time with zero effort, save and invest a large portion of my income. All of this takes me less than 15 minutes a week to manage on my smartphone. It’s both simple and powerful, and can be set up in less than an hour or two by anyone.

Financial expert Ramit Sethi was the inspiration for this system.

Step One – Grab a pen

On the back of a napkin, or on a spreadsheet, add up how much you spend each month on fixed expenses, things that are predictable and must be paid, and discretionary expenses, things that can vary a lot and can be delayed or changed when needed. Ignore expenses that come straight out of your paycheck like income taxes and health insurance, and don’t count any investing like 401k or IRA contributions.

Exact numbers aren’t needed. Overestimate your expenses since you’ll probably forget a few things, and it’s better to guess too high than too low. Take a maximum of 15 minutes to do this right now. Look at your online bank and credit card statements, especially year-end summaries, to quickly get an accurate estimate of your spending over the past year (including seasonal spending like winter holiday shopping and summer vacations.)

A single person who rents in a big city might have a budget like this:

Sample budget for single city person

Step Two – Take 20 minutes to set up free Capital One 360 checking and savings accounts

Do this even if you’re not ready to start the system yet. It’s free, you don’t have to deposit anything until you’re ready, and will only take a few minutes. Doing this now will make you more likely to complete the system later.

From this link, create a 360 Checking account. Pro tip: deposit $250 from your non-Capital One bank account if you wanna collect the $25 bonus. Link your other checking account either way so that it’s ready to go when you need it.

Capital One 360 Checking account Apply Now

Next, create one 360 Savings account for each of the ‘Discretionary’ categories sketched out in your budget that. If there are some categories that you don’t care about tracking individually, lump them back in with your Fixed list. I keep a separate Travel account, one for Household/Hobby items, and a few others. Limit yourself to 3 – 5 categories for simplicity. Make sure to give a nickname to each account to describe it (e.g.: ‘Travel’.)

Make sure to also set up discretionary accounts for short-term savings goals such as a future Wedding, New Car, or House Downpayment, for things you expect to purchase within the next 1 – 2 years. (Longer-term savings goals like Retirement will be handled separately.)

Finally, create one more 360 Savings account and label it ‘Short term Savings’. This will be where all of your income above your monthly spending (Fixed + Discretionary) will go. For example, if your take-home pay is $4,000 per month, and your expenses are $3,000, that extra $1,000 will be put into ‘Short term Savings’ for you to invest later.

To protect yourself from accidentally overdrafting your Checking account, click your Checking account, then click ‘Account Services & Settings’ and ‘Overdraft Settings’. Choose ‘Free Savings Transfer’ and choose your ‘Short term Savings’ account. This will allow Capital One to automatically pull money from your Short-term Savings account into your Checking if don’t have enough to pay your bills. If this should happen, you need to ‘refund’ yourself by moving money back into your Short-term Savings account from either your Checking or discretionary Savings account to replace the overdraft.

Setting up overdraft protection with a free savings transfer Capital One 360

Make sure to choose ‘Free Savings Transfer’:

Free Savings Transfer

Step Three – Redirect your employer’s direct deposit to your new Checking and Short-term Savings accounts

You’re doing great! Keep going and don’t get bogged down by the one-time annoyance of these last, crucial steps. If your employer offers direct deposit of your paycheck into your bank account (most do), set it up/change it so that your monthly Fixed + Discretionary amount is going straight into your 360 Checking account. See the FAQ below if you aren’t able to do this because.

In our $3,000/month example, if you get paid monthly, then set your direct deposit to put $3,000 per paycheck into your Checking, with the remaining balance going into your Short term Savings. If you get paid twice per month (semi-monthly), divide by two and deposit $1,500/paycheck into Checking. For biweekly/once every two weeks, multiply your monthly amount by 12/26 (ex: $3,000 * 12/26 = $1,385 per paycheck.)

(If you haven’t already, make sure to set up pre-tax contributions to your company’s 401k  with at least 10%-20% of your paycheck up to an IRS-maximum of $18,500/year (for 2018), or at a bare minimum, enough to collect any employer matching that you might be eligible for. If you use an HSA, you should also schedule automatic contributions to come straight out of your paycheck via your employer.)

Step Four – Set up automated transfers from your 360 Checking into your Discretionary 360 Savings accounts

From Capital One 360, click any account, then click ‘Transfer Money’ (top-right), and set up your ‘Monthly’ budgeted amount for the 5th of each month to go into one of your Discretionary category accounts (ex: $300 for Travel.) Do this for each of the accounts you created earlier. Make sure to first fund the account with a months’ worth of money, or schedule the transfer far enough out to give time for your direct deposit to occur.

Monthly discretionary transfers

The idea behind this is that from now on you’ll first check to make sure you have enough money in that discretionary account before you spend it.  After you spend the money, you’ll transfer the amount spent into your Checking account (or wherever the bill will get paid from.) Let’s say I want to buy a new couch that will cost $400. I first make sure that I have at least that much in my Household saving account, then I buy the couch with a credit card that auto-pays from my Checking account. Right afterward, I transfer the $400 from my Household account into my Checking, so that when my credit card bill comes due my Checking has enough in there to pay the added couch expense.

Step Five – Redirect your credit cards, payment accounts, and other bills to all get paid automatically out of your 360 Checking account

Now that you’ve set up all your accounts and recurring transfers and deposits, set up autopay on any credit cards or other bills that you have to come from your new 360 Checking account, preferably on the 3rd of the month, if you have a choice. Make sure to also make your 360 Checking account the default choice for any payment services you use like Paypal/Ebay, Venmo and Apple or Android Pay.

Go through every utility and service provider that you get a bill from and set up autopay, opting in to paperless emailed statements as well, including your landlord or mortgage company.

I try to pay all my fixed expenses with one credit card for simplicity. When I can’t pay by credit card, I use automated bank transfers, like for my public utilities, or online rent payments. (You can also get cash from your 360 Checking with no fees from any Allpoint ATM, and can request physical checks too from Capital One.)

Even rent payments to old-fashioned landlords that require checks can be automated since Capital One 360 allows you to schedule mailing a physical check using their bill pay.

You can also use a special credit card to pay for one specific discretionary category, and then set up that card to autopay straight from that Savings account. I use a ‘No Foreign Transaction Fee’ credit card specifically for travel expenses which I autopay straight from my Travel savings account, but then use a different rewards card for all my other expenses.

Congratulations, you’ve finished the one-time setup and are ready to use your new bulletproof financial system!

Step Six – Ongoing maintenance: transferring discretionary payments

Anytime you want to spend money that falls into one of your discretionary categories, 1) check to make sure you have that much in your corresponding Savings account, then 2) once you make the purchase, immediately transfer the spent amount from the corresponding Savings account into your Checking account (ehere the bill will get paid.) I use the Capital One 360 mobile app. This is the one manual step that you must do to stay on budget. Get in the habit, and it becomes second nature. You can also juggle money between discretionary accounts as needed. The only Iron Rule is to stick to your total spending goal of Fixed + Discretionary.

If you find that your estimates weren’t quite right, and you want to adjust how much you spend in different categories, or need more or less to be deposited into your 360 Checking each month, just tweak the steps above. The goal here isn’t to deprive yourself of spending money on things you love, or to meet someone else’s standards of what you “should” spend money on. Instead, you set your own spending priorities in a way that will keep you ‘honest’ on them, while allowing you to spend every dime that you’ve allocated for yourself guilt-free, since you know that your savings & budgeting is now all being taken care of automatically.

Step Seven – Ongoing maintenance: investing the Short-term savings for the long-term

You should periodically invest all of that money that will be piling up in your Short-term Savings account. Log into your investment account (or open one) and link your Short-term Savings account to it so that you can electronically transfer money.

Whenever I notice that a thousand bucks or so have accumulated into my 360 Short-term saving account, I log into my Vanguard investment account and transfer it into my Target Retirement Fund. Choose a Target fund with a year that is 15 years after your planned retirement date. E.g.: if you’re 30 and plan to retire at age 62 in 2050, choose the 2065 option. Fidelity and other money managers also have these funds. Make sure you’re paying low fees (less than 0.2% is ideal) and are broadly diversified.

There you have it. In just a couple of hours you’ve completely changed your financial life so that you know exactly how much you’re spending each month (without any ongoing budgeting), and have put yourself on the path to saving for financial independence.

Closing Thoughts

Each year, or whenever you have big money changes (have kids, buy a house, get married, change jobs), you can review your plan and adjust as needed, but try to set something that you’ll stick with for a long time so that you can truly be following the plan that you set for yourself. For me, sticking to my original budget that I set for myself 6 years ago has become a [nerdy] financial challenge that’s allowed me save more and more as my income has increased while keeping vmy spending constant. (But I’m definitely not depriving myself; nor should you! There’s still plenty of room in my personal budget for my hobbies, trips overseas, whiskey, and nights out with the lady or friends. Instead, the budget forces me to build DIY skills and prioritize what’s most important in my life.)

Recommended optimizations – Get cash with no ATM fees anywhere in the world

Whew… We’ve covered a lot of ground, but there’s one more item I recommend doing. If you use cash for some of your expenses, set up a Charles Schwab Investor Checking account. You can then use that to withdraw money from anywhere in the world and Schwab will refund your ATM fees at the end of each month. You’ll have to set up a Schwab brokerage account too, but there’s no obligation to fund or use it. (I don’t, and I’ve had the account open for years with no problems.)

I like to use cash as my going out/eating out/fun money so that I don’t have to worry about transferring money to my Checking every time I want to eat out or buy a drink at a bar. There’s also something about physically seeing the ‘pocket money’ I have for the month that helps me mentally plan out what I can spend. To make this easy, I add one more direct deposit step that sends my cash to my Schwab checking account each pay period. For our $3,000 example, let’s say our Single Person wants to use $250/month in cash to pay for Going/Eating Out. Instead of creating a Capital One 360 Savings account for that, their direct deposit will send $250 straight to Schwab from their paycheck, and only $2,750 to their 360 Checking, with the balance still going to Short-term Saving as before.

Now, they just use their Schwab ATM card whenever they need cash (and will get a ‘hard-decline’ by default if they run out, which is free, but could be embarrassing if you’re using the card as a debit in a public setting :). Just use your credit card as a fall-back and transfer money later if this happens!)

FAQ

Q: What if my employer doesn’t offer direct deposit / they don’t allow me to specify a fixed amount to go to one account and the balance to go to another / I’m self-employed?

A: Just deposit your whole paycheck into your 360 Short-term Savings account. Then, within Capital One, click any account, click ‘Transfer Money’, and schedule a monthly transfer of your monthly budget amount (ex: $3,000) at the beginning of the month from your Short-term Savings to your 360 Checking account:

Capital One 360 Transfer from Savings to Checking

Q: Do I have to use Capital One 360 for this system to work?

A: Ally Bank will work for this system too. Whichever bank you choose must let you create multiple savings accounts for free with no minimums, AND schedule recurring automated transfers between accounts. Feel free to suggest other banks that meet these requirements and that you have personally used in the comments.

Q: Why schedule the transfer for the 5th of the month?

A: Scheduling for the 5th of the month will help group all your monthly bills together, ensure that any end/1st of the month paychecks have time to hit your account beforehand, and that 1st of the month bills like rent get paid first. You should also set up your credit card(s) and, if possible, other bills to be paid around the 3rd or 4th, just prior to these transfers.

Q: What if I’m retired?

A: Just treat your fixed income, such as social security or a pension, as your ‘paycheck’, and deposit it in the way described above. If you’re also drawing down your personal retirement investments, you can set up monthly recurring withdrawals to fund your checking account.

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