Five Steps For Building Wealth Automatically

Liz Davidson, 07.02.10, 04:19 PM EDT
Putting finances on autopilot can build savings and ease stress.

If you're like millions of other investors, the number of accounts and bills you have to deal with has grown over time and your financial life has become increasingly complex. It probably seems like it's tough enough to make ends meet, much less save for retirement.
You know you should be keeping better track of your expenses, resisting frivolous spending, putting money away each month and rebalancing your portfolio at regular intervals to avoid being knocked around by bubbles and panics.

Why are such simple steps so hard to take on a regular basis? A growing body of behavioral finance research indicates that our brains didn't evolve to handle problems in which rewards and punishments are far in the future. We face the same issue in trying to manage our weight. Imagine being constantly tempted with a refrigerator full of cake and ice cream while being expected to slam it shut and drive across town to the natural food store every time you're hungry.

Sound ridiculous? We expect ourselves to do the financial equivalent with our money every day. What if we turned that approach on its head? One of our planners tries to keep his house full of nothing but healthy foods to make it an effort to eat something unhealthy.
You can do the same thing for your finances by making healthy financial choices your default options. One way you're probably already doing this is by contributing to a 401(k) or similar retirement plan. Once you've opted in, you make contributions on a regular basis without lifting a finger--a move that studies show makes people much more likely to contribute and to do so in larger amounts.

By taking just an hour to create a similar “set it and forget it” plan for the rest of your finances, you can set yourself up for a lifetime of financial success while saving yourself from the unnecessary heartaches, stress, and apologies that managing money can otherwise entail. The sooner you start, the more time and money you'll save. Here are five simple steps you can take today:

Pay bills automatically to avoid missing payments: This can be especially important to frequent travelers. One of my firm's planners has his cellphone, cable and landline bills charged to his credit card  and his credit card, rent, utility, and insurance bills debited automatically from his checking account. This maximizes his credit card rewards and avoids late payments. Of course, you have to make sure that you always have enough money in your account to cover the expenses. To handle that risk, another planner uses auto pay only for charges that are the same each month and uses online bill pay for other bills to control when money leaves her account. She also points out that online bill pay reduces identity theft risks by keeping sensitive information out of her mailbox and trash.

Save for vacations, holidays and rainy days via autopilot: Most banks and credit unions let you automatically transfer money from checking to savings accounts, but there's also a free online service called SmartyPig that makes the process simple and efficient. The site allows you to specify goals, what they cost and when you'd like to reach them. It then transfers the amount you need to save each month from your checking account into an FDIC-insured savings account paying 2.15% in interest on balances up to $50,000. You can stop funding your goal and redeem your money anytime you want.

Use aggregation sites to track accounts and expenses: One of the biggest and best known of these sites is Mint.com (now a part of Intuit ( INTU - news - people )). While it takes a bit of work to input your information, Mint.com will aggregate it from various bank, credit card, brokerage and mutual fund accounts and categorize your spending. You can then run reports, set budgeting goals for how much you want to spend in different categories and even receive alerts when you go over a particular limit. That way you can make sure your bills are paid and also in line with the budgeting goals you've set.

Increase your annual 401(k) contributions automatically each year, if your company permits it:  You might be surprised at how much faster your account balance will grow and how little you'll miss the money you're saving.

Invest contributions in a balanced or target-date retirement fund to maintain balance: If you're the sort of person who tends to ignore your investments, these funds are a good way to maintain an appropriate asset mix without lifting a finger. Just make sure to factor into your allocation any savings you have outside of retirement accounts as well.

By putting your finances on autopilot, your money will work as hard for you as you did for it.

Liz Davidson is CEO of Financial Finesse, a provider of financial education for employers nationwide.

From Forbes published on 07.02.10, 04:19 PM EDT