Can automation allow you greater control of your personal finanaces with no added work AND raise your financial net worth?
In today’s topic, let’s bring the word automation into the personal finance realm. Based on the dictionary definition of automation, adding automation to your personal finances promises to be a potential solution to those who find that the day to day management of personal finances too cumbersome or annoying.
Automation – The technique, method, or system of operating or controlling a process by highly automatic means, as by electronic devices, reducing human intervention to a minimum.Dictionary.com – Automation
Lately, the focus of people and households has been towards a different type of automation – Home Automation. Multiple major companies within the technology space like Amazon Alexa, Google Home and even Samsung with the Smartthings brand have products that are promised to conveniently bring voice and automated routines to your thermostats, light switches, door bells, cameras and other devices to simplify your lifestyle and routines.
Introducing Automation in Personal Finance
Now, let’s adapt this same goal of automation to “simplify your lifestyle and routines” to personal finance. How can we do this? Well, let’s work within banking, mobile apps and processes that exist to bring this into existence.
Fintech – What is this?
The first thing we need to discuss when talking about automation in personal finance is “Fintech” – fintech is described as a hybrid term combining financial and technology industries. These technologies allow users to transfer money electronically, review statements online and now even invest in real time on different platforms. See the video below for a summary with more information on this emerging technology.
Some examples of fintech wihthin the US market is Chime, Venmo, SoFi, Acorns and Robinhood. In Canada, some fintech companies include Wealthsimple, Freshbooks with many others listed here. Elsewhere in the world, some fintech companies are Adyen, Ant Financial, M-Pesa and Xero,
On the investing front, we have seen some significant growth in investing within the Robinhood infrastructure bringing this fintech valuation north of $11B.
Great, now that we know Fintech, now what?
So now that we know what fintech is, how can this help you in your personal finances. Well it certainly can help you if you want to transfer funds to someone else, invest money or borrow money.
How can we get back to our goal of managing our day to day finances with personal finance (PF) automation?
Automation – How to Begin?
So let’s get back to personal finance automation. How can we automate?
- Step 1 – Create Your Budget
- Step 2 – Check your banking features
- Step 3 – Create Separate Accounts (Sinking Funds)
- Step 4 – Automate Your Finances
- Step 5 – Relax and Trust the System
Step 1 – Create Your Budget
The first part of this process goes back to personal finance basics, you need to know your income and current monthly spending; unfortunately, there are no shortcuts to this process. Creating a budget, either paper or electronically via spreadsheet or another means, will start with reviewing your spending for at least 6 months to ensure you have an accurate representation of your current spending and income. Once you have this data, you can move into step 2.
Step 2 – Check your banking features
The next step of this process is to check your current banking options – Do they allow multiple sub-accounts, automatic transfers, rounding up purchases and automating bill payments? If you answered no to any of these options, perhaps you need to find another bank in order to fully automate your finances. If we review the major banking options in Canada, we see that the traditional big 5 banks are struggling to add these features, while the secondary banks like Tangerine, PC Financial and Simply Financial do offer these required features.
Step 3 – Create Separate Accounts (Sinking Funds)
If your bank allows the creation of sub-accounts within your main banking account, this is the key to the next step of automating your finances. Some other financial sites also call these sub-accounts sinking funds – What is a sinking fund?. Based on these sinking funds and our work in step 1, we can now create some sub-accounts to track the largest purchases or biggest risks to personal finance.
Some of the most common sub accounts are for Housing or Rent, Car or Transportation needs, Food, Entertainment, Vacation and the like. Here is a Reddit thread that explains this concept for Canadians. The total amount of sub-accounts required will vary based on your personal needs: do you have kids, pets, in-laws to support? Perhaps you should create accounts for these items as well.
Step 4 – Automate Your Finances
Now that you have a bank that allows sub-accounts (Step 2), you can setup separate accounts (Step 3) and you should have accounts for Home, Car, Food, Vacation or other needs. The next step is to automate funds to transfer into these accounts. Based on our budget review (Step 1), we know accurately the amount of money coming in (income) and monthly expenses and risks based on your individual needs.
Now you can login to your bank and setup an automatic transfer to these accounts, based on the frequency of your pay period (monthly or bi-weekly). Based on the sample below, you would have 4 separate accounts in addition to your standard savings / checking accounts = Car, Home, Food, Vacation.
Automation – Sample Budget
$5,000 Income ($60,000 Yearly)
- Car Fund = Monthly $1000 (Gas, Payment, Maintenance)
- Home Fund = Monthly $2000 (Payment/Rent, Taxes, Insurance, Maintenance)
- Food Fund = Monthly $600
- Vacation Fund = Monthly $400
- Other Costs = $1000
Step 5 – Relax and Trust the System
Now that we have the automation in place, we can review the situation after a few months or quarterly – Likely, each of these funds would have monthly transfers happening; cash ready for expected an unexpected expenses. Therefore, after a few months, quarterly or yearly, you should have a positive amount remaining in each fund – based on your own individual budget. A positive aspect of this automated system is to act as an emergency fund for each of the highest risk items in your budget.
Another slight modification to this automated technique is to have funds transferred to debt payments if you still owe money on your credit card or other loans. Therefore, if you spend some time setting up this process, you can adapt this system to meet your individual needs for most every situation. Now you can monitor, spend less time worrying about finances. spend less time managing the day to day aspects and feel confident that your biggest risks in your budget are covered by this automated process.
Based on the personal finance automation system presented above, you can easily setup your own custom automated system to pay off debt, save for a new car, save a down payment for a home or invest additional funds into retirement or investing accounts.
This provided process will also allow you to have additional free time – not having to remember and transfer money to pay bills or save for larger savings goals.
This process also adds peace of mind, not having to worry about funding your largest budget risks and seeing a positive balance over time in individual accounts earmarked for important items in your own personal finance lifestyle.
We hope this system will add some peace into your own personal and family financial system and give you some freedom and confidence in you personal financial future.
Do you have a different financial system? Is there something you would recommend to others based on personal finance automation?
If you want to support our efforts at http://www.personalfinanceexperiment.com, please leave a comment, hit the like button and subscribe to the blog.
Also, if you like what you read – Please consider supporting us with a coffee – https://www.buymeacoffee.com/PFExperiment