Simple Ways To Put Your Finances On Autopilot
Have you ever had a waiter or waitress take your order without writing it down? Whenever that happens to me, I am so impressed when my order comes out correctly. In the days when I waited tables, I tried the memory method. I would take an order and recite it in my head - pickles on the side, hold the mayo, no ice in the soda and split the check five ways – but before I could make it to the register to enter the information, I would inevitably get stopped by someone wanting me to greet a table or bring a refill. If I was lucky, the new request wouldn’t overwrite the previous person’s pickle preference, but more often than not, it did.
I quickly learned that I needed a system to have any chance of remembering the details. In my current day-to-day, my system for remembering everything I need to do includes post-it notes, email and iPhone reminders, calendar appointments and a daily to-do list. I’ve just accepted that I am inevitably going to forget anything I don’t write down.
Research supports what we all know anecdotally to be true: when we try to remember too many things at once, things fall through the cracks. Our working memory, the part of our brain that keeps track of things that we are actively working on, can only hold so much information. Studies show that when ideas compete for priority in the working memory, it actually erodes the memories themselves. If we try to remember the pickles and the refill at the same time, the likelihood is that we’ll remember one and forget the other. One memory will win the competition for the working brain’s attention and the other will lose.
That’s where a system for writing things down, setting reminders and color-coding our dry erase board comes in to take the load off the working memory. The challenge is that many of the important things in our life that aren’t necessarily urgent, for example, our finances, often don’t make the list. Sure, we might have a reminder to pay our bills but how many of us make it a priority to review our 401(k) investments, update our beneficiary designations or ensure we’re earning a decent interest rate on our cash? The thought may cross our mind but in the frenzy of getting it all done, we often prioritize picking up the milk over picking up a little extra return on our savings.
Even though the consequences of neglecting our financial housekeeping are more detrimental in the long run, they don’t feel nearly as clear and imminent. Forgetting the milk means we might not get our desired cup of morning coffee or have breakfast for the kids; we know that’s bad. What are the consequences of not reviewing your 401(k)? Most of us don’t know, and even if we do, we can’t quantify it which makes it easy to let it go for another day, week, month or year.
The hope is that eventually, we’re going to have time to get around to these things. The reality is that we usually don’t until something goes wrong. So, how can we make sure our important financial tasks make it on our short list of priorities without letting them overtake all the other important things we need and want to do with our time? We can employ tools that put some things on autopilot and others that alert us when we need to pay attention.
Saving. Setting up recurring savings through payroll or our bank is not only a time-saver; it also increases our likelihood to save. Every time we have to make an active decision to save, we have the chance of talking ourselves into spending the money instead. By automating our savings, we choose good behavior in advance so we’re more likely to stick to it.
Saving increases. Many retirement plans and college savings accounts give us the option to automatically increase our savings by a certain amount each year. If we take advantage of that, we will save more overall and minimize lifestyle creep, the tendency to spend more as our earnings increase. The amount we need to save for retirement is hugely impacted by how much we spend, so if we can moderate spending, we’ll get to financial independence faster.
Diversification. A simple way to get exposure to different kinds of stocks and bonds is to look for mutual funds with a year in their name, something like “Target Retirement 2040”. These funds have a pre-selected mix of stocks and bonds that require little ongoing management and get gradually more conservative as we near retirement. Since 1970, $1 invested in only large U.S. stocks (i.e. the S&P 500) would have grown to $116 while the same $1 in a portfolio with 60% diversified stocks and 40% bonds would have grown to $423. Diversification matters.
Overdraft protection. Even the best of us can occasionally overdraw our checking account. Our savings account can cover the shortfall and save us unnecessary bank fees.
Payment due alerts. Nobody wants a blemish on our credit report for a late payment, especially since timely payments are the number one influence on our credit score.
Insurance policy lapse notices. After going through the work to get a life, disability or long-term care policy, the last thing we want is for the policy to lapse due to lack of payment. Add a third party like your financial planner to your policy so someone else gets a notification that your policy is at risk of lapsing.
Credit alerts. Websites like Credit Karma will show us our credit score for free, but they can also notify us if our credit report changes or if there is suspicious activity that might indicate identity theft. Sign up and make sure your email communications are turned on. While you’re at it, set an annual reminder to review your credit report at www.annualcreditreport.com.
While it is detrimental to simply forget our financial responsibilities, it can be beneficial to set and forget them. With the right tools, we can achieve financial success and give our minds the space to address everything else on our to-do list.
As originally published on Forbes: https://www.forbes.com/sites/danielleseurkamp/2019/06/13/simple-ways-to-put-your-finances-on-autopilot/#3dd29b0c7729