WEEK FIVE OBJECTIVE: Set up recurring automatic transactions for at least $50 per month.
WEEK 5 ICEBREAKER: 7 Money Habits That Are Red Flag Behaviors
Planning is over. It is time to move real money! We suggest setting up 5 recurring automatic transactions to five different accounts. Why not follow week four’s money cascade plan? Right now, we are going to capitalize on your focus and motivation! We are going to “front-load” the work now so managing your plan is easy going forward. Setting up recurring automatic transactions can be tedious, however increasing transaction amounts later is quick and easy.
The following accounts are suggestions however, you are in charge. You can skip any accounts that don’t apply to you, and swap for accounts that are a better fit. If you would like to invest more or less money, invest whatever works for your budget.
STEP 1: Automatically Invest $10/month in your emergency fund IN A HIGH INTEREST ACCOUNT
Step 2: Automatically Pay $10 extra on any debt you are carrying, such as credit card, car loan, student loans, or mortgage.
Step 3: Open a ROTH IRA and automatically contribute $10/month.
Step 4: AUTOMATICALLY CONTRIBUTE $10/month to your employer’s 401K or 403b retirement account
Step 5: AUTOMATICALLY COntribute $10/month to a SEPErate Saving Account and start a “Wants” list.
Hello All! A combination of pinkeye and a cold has interrupted progress loading the Week 5 content onto the website. I have pasted everything onto this one page below so EVERYONE can proceed while I am catching up making the properly formatted webpages.
STEP 1: Automatically Invest $10/month in your emergency fund IN A HIGH INTEREST ACCOUNT
Open a high interest account for your emergency fund. In “I Will Teach You To Be Rich”, Ramit Sethi recommends Capital One 360 and Ally (not an affiliate link). Their interest rates are frequently as much as 10 times higher than your current checking or savings accounts, and they have excellent customer service. Starting your emergency fund account at a different bank than your checking account is designed to create friction to help you actually save the money for a true emergency, and resist emptying out the account to buy the latest iPhone or trip to Hawaii. (See step 5 for splurge purchases)
You will use the routing number and account number from a check from your current checking account to automatically transfer $10 from your checking account to your high-interest saving account each month. If you have any trouble finding the right place to set up this monthly automatic transfer on your high-interest saving account website, call their customer service to walk you through the process.
This step should take you about 30 minutes to an hour.
Step 2: Automatically Pay $10 extra on any debt you are carrying, such as credit card, car loan, student loans, or mortgage.
Pay $10 extra on any debt you are carrying, such as credit card, car loan, student loans, or mortgage. For many people, credit cards will be the best place to start, usually having both the highest interest rate and the lowest balance. Enroll in AutoPay for all your credit cards and other debts to ensure all your payments are applied to your balance rather than late fees. Even if you can only afford the minimum payment, enroll in AutoPay. You will need the routing number and account number from a check from your checking account to enroll in AutoPay.
To pay $10 extra each month, create a Bill Pay “payee” in your checking account that will transfer the additional $10 to your credit card company with the lowest balance. Set the Bill Pay to automatically transfer $10 each month to your credit card “payee” 2 days after the AutoPay from the paragraph above.
When the first credit card is paid off, move on to paying $10 extra on the debt with the next lowest balance (credit cards, car loans, student loans, mortgage, etc…). Dave Ramsey followers call this debt payoff method the “Debt Snowball” because each debt you pay off results in more cash to pay off the next debt.
Now that you have this credit card Bill Pay “payee” in your checking account, it is easy to make an extra bonus payment anytime you have unexpected cash, such as a tax refund, a birthday check from grandma, or a federal Child Tax Credit.
This step should take you between 30 to 90 minutes.
Bonus Info
Math enthusiasts will tell you to ignore the balance and pay the debt with the highest interest rate (aka the “Debt Avalanche”). If we were all robots, this would be 100% correct! However, the psychological benefit of finally paying off a debt in full is amazing and is the most effective incentive to tackle the next debt. See a full comparison of the two debt payoff methods in this YouTube video:
Next Level Life – Debt Snowball Vs Debt Avalanche | Which is the Best Debt Payoff Strategy?
If you need extra motivation, watch this video to see how amazing it feel to be debt free
YouTube – Debt Free Screams – Dave Ramsey Show – Debt Free Scream – $200,000 paid off in 3 years 2 months – Student Loan
Step 3: Open a ROTH IRA and automatically contribute $10/month.
A ROTH IRA allows you to invest money today and let it grow for a few decades and then withdraw it TAX FREE after you are 59.5 years old. Please note, there are income limits, continue reading below to confirm you are eligible.
It is critical that you set up your monthly $10 contribution to transfer automatically. Humans are terrible at remembering to manually transfer contributions each month. NO ONE remembers, accept this reality and plan accordingly.
Wait!!! What if you need your money before you are 59.5 years old? This is one of the many benefits of a ROTH IRA. You can withdraw your contributions penalty-free 5 years after opening the account, however you must leave the earnings and dividends in the account until you are 59 ½ years old.
For example, you contribute $10 a month ($120 a year) for 15 years in a low-fee broad-based index fund such as Fidelity’s Total Market Index Fund (FSKAX). You earn average returns of 8%* and after 15 years you have $3,289.98. You could withdraw your contributions $1,800 penalty free ($120 per year X 15 years) and leave the earnings and growth, $1,489, to continue growing until you are 59.5 years old or older. If you are truly desperate, you could withdraw the $1,489 of earnings and growth as well, however you will pay a 10% penalty tax fee on that portion.
This step should take you between 30 to 120 minutes.
Fidelity’s FSKAX is used for this example because Fidelity allows you to open a ROTH IRA with no minimum required initial investment and invest in the mutual fund FSKAX (and some others) with no minimum required contribution. This means you can open a ROTH IRA at Fidelity and contribute to FSKAX, a low-free broad-based index fund, with only $10 a month (or even less if necessary). Please note, as you become closer to retirement age you may choose to invest in a less volatile fund such as a “target date fund”, a “balanced index fund” or even a “bond index fund”.**
Read the article at the link below to investigate other companies that offer ROTH IRAs with no minimum deposit.
Investopedia – Who Offers IRA Accounts With No Minimum Deposit?
In 2021, you can invest up to $6,000 each year in a ROTH IRA. Also, if you earn more than $125,000 as a single person or $198,000 as a married couple read this article to learn more about your contribution limits:
Investopedia – Roth IRA Contribution Rules: A Comprehensive Guide
https://www.investopedia.com/articles/personal-finance/081615/basics-roth-ira-contribution-rules.asp
*8% is the minimum inflation-adjusted average rate of return for the stock market over every 30 years period in the last 100 years
**To learn more about the stock market and which index funds to select, consider reading the book “The Simple Path to Wealth” by J.L. Collins, also available in audiobook. This book explains how to withstand the volatility in the market and how to adjust your holdings when you are living off your investments in retirement. J.L. Collins followers may ask why I did not recommend J.L.’s favorite Vanguard VTSAX fund above. Unfortunately, VTSAX requires a $1,000 initial investment, however Fidelity’s FSKAX is similar.
Playing with FIRE- The Simple Path to Wealth with JL Collins
Step 4: AUTOMATICALLY CONTRIBUTE $10/month to your employer’s 401K or 403b retirement account
Contact your employer’s Human Resources (HR) Department to open a 401K or 403b retirement account and automatically contribute $10 a month. A 401K or 403B is an employer-based retirement plan that you can contribute with pre-tax dollars. That means that the money that you invest is not taxed at all this year. Instead, you are taxed when you withdraw the money in retirement, when you may be in a lower tax bracket. Withdrawing the money before age 59.5 would result in a 10% tax penalty, however you can “loan yourself” $50,000 (or 50% of the assets, whichever is less) from your 401K without tax penalty ***. Please note, some employers offer “matching funds”, which means the employer puts additional free money in your retirement account when you contribute. Warren Buffett, Ramit Sethi, JL Collins and many others recommend investing in a low-fee broad-based index fund. Ask which fund is closest to an S&P 500 Index fund (the most common index fund) and confirm the fees are less than 1% a year.
This step should take you between 30 to 90 minutes.
If you are do not have access to a retirement account at work, contribute this $10 a month to your ROTH IRA instead.
***To learn more about 401K loans and why they may or may not be a good idea, read this article.
Investopedia – 4 Reasons to Borrow From Your 401(k)
https://www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp
Step 5: AUTOMATICALLY COntribute $10/month to a SEPErate SavingS Account and start a “Wants” list.
You have been saving money, you are getting out debt, you are investing toward your retirement, You Rock! But what about now? What about enjoying the journey of life? This account is where you accrue money in advance for you next vacation, a new iphone, a sweet leather jacket… It is your choice.
For the first time you can enjoy these pleasures guilt-free because you saved in advance, and you are simultaneously making progress toward your financial goals. You may also find that after a few days, you realize that you don’t want that air fryer after all, which saves money and reduces clutter in your home.
Create a new savings account and automatically transfer $10 each month from your checking account to the “Wants” savings account.
This step should take you about 15 to 30 minutes.
Step 6: LET IT RIDE!!!!!!!
Let the system ride for a few months and enjoy the feeling of making progress financially. Enjoy feeling less stress and overwhelm when you think about the future. Feel the relief of learning that “money stuff” wasn’t that confusing after all, it was just a bit tedious to set up. Be proud of yourself for putting the effort in to create the 5 accounts and enjoy the reward of everything running automatically for the months thereafter.
As your income increases or your expenses decrease, you can log back into any of these automated transactions and increase the amount transferred. It is quick and easy to do once the automated transaction exists.