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.

Ramit Sethi will teach you to be rich – 4 links to wealth: negotiate, automate, cut costs & earn more

Ramit Sethi is my favorite financial blogger and advice-giver for the ‘basics’ (which can still be complicated) of personal finance: spending, saving and earning income.  He recently railed against those who worry about things that they can’t control, yet fail to do the simple steps that will really matter.

His quoted question below to these people (and everyone else who needs to take control of their money) have 4 excellent starting points (links) for personal financial freedom.  Check out each of these and apply them to your financial life.

“Have you negotiated? Automated? Earned more? Taken the 30-day challenge to save $1,000?”

Negotiation

Ramit stresses the importance of negotiating all things financial, from credit card interest rates, getting out of bank fees, to your next salary raise.

Automation

The best way to save is to automate the process so that no active effort is required on your part.  This can be anything from setting up direct deposits on your paycheck (most employers allow you to split the check into multiple accounts, the better to target your savings goals), having 401k deductions come out of your check, or using Vanguard (or whoever your mutual fund provider is) to invest money from your bank account on a regular schedule.  (If you already have a Vanguard account, go here.  If you need to set up a Roth IRA or other financial account, go here.)

Earn More

Expenses are only half of the financial coin of savings.  Earning a healthy salary is also a big help along the road to wealth.  Here’s a few ideas on how to make more money:

Get an education (academic or vocational, formal or informal) that increases the worth of what you know, and your ability to apply that knowledge and make money (or other benefits) from it.

Ask for a raise at work.

Start your own business on the side, or find a part-time or freelance job that you can do in your spare time.  (Make it something you enjoy and that energizes you, otherwise it’ll be hard to force yourself to do it given your other work/life commitments.)

Save Money – Enter Ramit’s ’30 day challenge’

Ramit put together a fantastically useful list of 30 tips (described in each of the links below) to save money.  These aren’t the typical ‘stop buying lattes’ ideas generated on so many financial blogs.  Instead, they’re likely to save you big bucks without taking away the things that you really enjoy in life.

While I’ve copied Ramit’s entire list below (with his links for the details of each tip), his original post can be found here.

Full list of Ramit Sethi’s tips from iwillteachyoutoberich.com
Tip #1: Pack lunches for the rest of the week
Tip #2: Turn your thermostat down 3 degrees
Tip #3: Sell something on eBay today
Tip #4: Involve your friends in your savings challenge
Tip #5: Optimize your cellphone bill
Tip #6: Use gas prices to become your own hedge fund
Tip #7: Create a “No Spending” day once a week
Tip #8: Implement the A La Carte Method
Tip #9: Only buy new things when replacing something old
Tip #10: Use the free rewards from your credit card, car insurance, and workplace
Tip #11: Never pay full retail price for clothes or eyeglasses again
Tip #12: How I’m saving $2,000+ on eating out in 2009
Tip #13: How to negotiate your car insurance
Tip #14: Use self-persuasion to share how much you’ve saved so far
Tip #15: Forget going to a bar — ask people over for dinner
Tip #16: Cancel any large purchase this month
Tip #17: Buy generic for the stuff you don’t care about
Tip #18: No Christmas gifts this year
Tip #19: Save Money, Eat Well and Look Hot in Less Than an Hour
Tip #20: Change the date of Christmas
Tip #21: Save thousands by pre-paying your debt
Tip #22: Analyze your progress in the 30 Day Challenge (plus, see how I’m doing)
Tip #23: Go cash only for 15 to 30 days
Tip #24: Cut your commute expenses by 40%
Tip #25: Earn more money using your God-given skills
Tip #26: Gardender? Cleaning lady? DIY instead
Tip #27: Use barriers to prevent yourself from spending money
Tip #28: Use price-protection guarantees to always get the lowest price (travel, retail)
Tip #29: Stop being a loser and spend money to save money
Tip #30: How I’m saving $25,000+ in 2009

 

Smoking is bad for your wealth: Quit today!

Today, everyone can repeat the Surgeon General’s warning that smoking is terrible for your health.  Given the high costs in terms of everyday spending, insurance rates, quality of life, and other effects, smoking is also extremely harmful to your wealth.

Direct costs of smoking – the high price of cigarettes

According to a 2002 study, the average smoker smokes 13 cigarettes per day.  If we assume that a pack is 20 cigarettes, and the average pack costs $5, that’s $3.25 per day (= 13/20 * $5) or $1,187 per year.  Obviously, the more you smoke, the more it’s costing you.  With the federal tax per pack having been raised to over $1 combined with many state taxes at $2 (including Washington’s), the cost of cigarettes seems to only be going up ($6.33 per pack in Washington state as of this writing.)

For reference, a person in the 15% tax bracket could quit smoking their 13 cigarettes per day and contribute nearly $1,400 per year (pre-tax) to a 401k.  If this person quit smoking at age 30 and retired at age 65, their 35 years’ worth of cigarette savings would’ve grown to $206,000 (in real dollars) given historical stock market returns of 7%.

Indirect monetary costs of smoking – insurance, job prospects, resale values

In an article on the high costs of smoking, MSN Money “pulled some online quotes on 20-year term life insurance (a $500,000 policy) for a healthy 44-year-old male … The lowest quote for a nonsmoker was $1,140 in premiums per year; for someone smoking a pack a day, the lowest price more than doubled to $2,571 per year.

[…] According to eHealthInsurance.com, the monthly premium for a policy from Regence Blue Shield with a $1,500 deductible for a 44-year-old male nonsmoker is $552 more a year [for smokers].

A few state governments also charge their employees extra for health insurance if they smoke, and others are gradually joining the trend.”

Additionally, home owner’s typically receive a 10% discount for being non-smokers, tacking on about $85 per year for smokers, given average home insurance premiums of $850.

“Numerous studies find that smokers earn anywhere from 4% to 11% less than nonsmokers. It’s not just a loss of productivity* to smoke breaks and poorer health that takes a financial toll, researchers theorize; smokers are perceived to be less attractive and successful as well.”

Add on higher dry cleaning bills, lower resale values of homes and cars (or money shelled out to clean them), and perhaps the occasional teeth whitening service, and you’re looking at a few to several thousand a year to smoke.

[* – I should note that in fairness to smokers, I’ve read assertions that other than early death, there are no appreciable losses in job productivity attributed to smokers.  However, if employers believe there are anyway, smokers will still receive lower salaries, everything else being equal.]

Indirect non-monetary costs of smoking

Besides bad breath, yellow teeth and smelly personal effects, smoking seriously reduces one’s quality (and length) of life.  The average smoker dies 7-8 years sooner than a non-smoker.  In addition, they are way more likely to live an unhealthy (and therefore uncomfortable) old age, suffering higher incidences of various cancers, heart diseases and strokes:

“The number of people under the age of 70 who die from smoking-related diseases exceeds the total figure for deaths caused by breast cancer, AIDS, traffic accidents and drug addiction.”

There are other side effects as well due to reduced blood flow: “For men in their 30s and 40s, smoking increases the risk of erectile dysfunction (ED) by about 50 per cent.”  For both men and women, smokers’ skin develops more wrinkles and looks paler.

The sooner you quit, the better

The benefits of quitting become immediately apparent (including more cash in your pocket):

From Wikipedia: “The immediate effects of smoking cessation include:

  • Within 20 minutes blood pressure returns to its normal level
  • After 8 hours oxygen levels return to normal
  • After 24 hours carbon monoxide levels in the lungs return to those of a non-smoker and the mucus begins to clear
  • After 48 hours nicotine leaves the body and taste buds are improved
  • After 72 hours breathing becomes easier
  • After 2–12 weeks, circulation improves

Longer-term effects include:

  • After 5 years, the risk of heart attack falls to about half that of a smoker
  • After 10 years, the risk of lung cancer is almost the same as a non-smoker.”

While quitting is difficult due to the addictiveness of nicotine, there are several methods that greatly increase your chances of succeeding.  Try to surround yourself with those who have quit smoking, or are non-smokers:  “A study found … that smoking cessation by any given individual reduced the chances of others around them lighting up by the following amounts: a spouse by 67%, a sibling by 25%, a friend by 36%, and a coworker by 34%.”  So if your significant other, friends or coworkers smoke, try to get them to quit too.  You’ll both help each other succeed.

The best approach using pharmacological aids seems to be use of “[t]he Nicotine Patch plus [as needed] use of gum or spray” which “increased quit rates to 36.5%, the largest quit rate reported.”  In addition, joining a social ‘support’ group seems to help.  “Programs involving 8 or more treatment sessions can double success rates.”  Use support lines like 1-800-QUIT-NOW (1-800-784-8669), to talk to an expert and increase your likelihood of success even further (live IM chat is available too.)

Despite all these methods, it often takes people more than one attempt to quit, so keep at it if it doesn’t work out the first time.  Set a date to quit, then use the above resources to stick to it.  You can get started by tossing your cigarettes & buying some nicotine patches and gum.  Then, check out this free quitting guide at smokefree.gov.

Good luck, your bank account and body will thank you!