When I first arrived in the US, I read a lot about how banking and getting paid works. One thing that stood out was that most people in the US are paid on a different schedule than what I was used to. In France, you mostly get paid at the end of every month, so there is really no such thing as living paycheck to paycheck. Technically, sure, we do. But since we’re getting paid monthly, it aligns perfectly with having monthly living expenses, so it ends up being a non-issue.
Another thing I discovered, which totally rocks, is that you can set up your direct deposit so money is deposited into different accounts. I wish we could do that in France.
And last, in America, we pay our income taxes up front, and they’re deducted from our paycheck. So what you get into your checking account is what you actually have left to spend.
I took this opportunity to take a good look at my (non-existent) financial situation and how to improve it, without giving me a headache. I’ve always been super bad at saving money. I would start saving, putting away a few hundred euros at a time, but irregularly, and it always, always ended up getting spent after it reached a few thousands. For no good reason, either.
So I decided to listen to conventional wisdom (for once), and took advice from a couple of PF blogs. Which brings me to the pillars of my money management system :
- Pay yourself first. Ah. Didn’t see that one coming, did you ? All my life, I’ve done what almost everybody does. Spend my money, and then save “whatever’s left at the end of the month”. Guess what ? Doesn’t work. So now, I’m saving money first, and spending what’s left. And, IT WORKS.
- Have a budget. And stick to it. Duh.
- Automate your finances. I have to thank Ramit Sethi for that one. Everything’s automated. Including my savings, that are taken directly out of my paycheck. They’re money I don’t see, so I don’t miss it. The only way I finally managed to save money was by removing myself from it. No more making a decision, no more having to move money, no more finding excuses not to (or excuses to reduce the amount), no more “I’ll do it tomorrow”.
I’ve done quite a lot of experimenting in 3 years, but I think I have found what works for me :
- My paychecks are divided into two separate deposits. The first one is exactly one half of my monthly budget (I get paid bi-weekly). This money is deposited into a “savings” account at my main bank. I use quotes because the APY is close to zero, but the goal is just to keep that money separate from my checking account until it’s time to use it.
- The rest of the paycheck, which can vary, for example if I have a few hours of overtime, is deposited into my Down Payment savings account. This one is in another bank, and while the APY is also ridiculously low, it’s still one of the best available. Boom. Money saved, forget about it. And I didn’t have anything to do. Sweet.
- On the first day of every month, I pay off all my credit cards, out of my checking account. The whole balance at that date, i.e. all of my expenses of the previous months.
- On that same day, the money for this month is automatically transferred from my Buffer to my checking account.
This setup has quite a few advantages. The only thing I manually do is to pay off my credit cards, because none of them offer the possibility to do so. Automatic payments are limited to the full balance at the day of closing.
The rest lives its life on its own. I track my expenses and my budget in YNAB, not based on my checking account’s balance.
Another very important point, is that my savings are not only automated, they’re also prioritized. By choosing a fixed amount to be deposited for monthly expenses, and the rest into savings, I actually save 100% of every single dollar I make above my base salary. Until two months ago, I was doing it the other way around : save $800 per paycheck, and keep the rest. But by doing this, I have saved $2,200 last month instead of my usual $1,600.
Lastly, the most important thing : I’m totally removed from the equation. Last year, I was automatically saving $500 per paycheck, and I had a period where I spent money lavishly on stupid stuff for several months (long story, full of very good excuses). I let my old self take control again. I did have to transfer some money back from my savings to cover it, but I never took the time to actually change the deposits. This is the power of inertia, and how “set it and forget it” allowed me to still save $4,500 in 2014. Had I had that money in my checking account, it would be gone by now.
I do it for savings, but it can be done the same way for debt payments, and credit cards. Set them up to automatically withdraw the full balance every month. If you know it’s coming, you will spend less.
Automate your money. Set your goals, set your budget around them, and implement it so it’s done automatically. You’ll be amazed at how well it works.