Automatic Accounting

They always say time changes things, but you actually have to change them yourself. - Andy Warhol (1928 - 1987), The Philosophy of Andy Warhol

On Saturday I attended a conference at the Peachtree Westin (in downtown Atlanta) where Travis Smiley gave a small motivational speech about what to do with the 60 seconds that we are given in every minute (AKA "the present"). It was very stimulating to say the least, but in summary, the biggest thing I took away from that speech is that if we need to make a change, we need to do it now.

In addition to that, I attended a small workshop after the speech hosted by Nationwide called "Securing your Future" (from a financial standpoint). The information that was being taught was the very basics of investing. (401k, IRA, annuities, etc) However it was shocking to see that to most of the faces around the room, this was brand new information. I see that it is a privilege to know as much as I know at 23 (although I am sure that I should know a lot more), however, I there is a need in Atlanta to educate many about basic principles about personal finances.

I decided to challenge myself and make this this is my personal mission to educate those I come in contact with simple personal finance principals so that the playing field is even. I was discussing earlier at our meeting that the rich get richer and the poorer get poorer not necessarily due to work ethic, but more because of knowledge. The rich have the "know how" and most others are left in the dark. To try to create a light in the darkness, I have written a small informational on a topic that I presented during our group meeting today.

Automatic Accounting

I. Introduction

• Been using automatic accounting since 10/2006.
• Reached emergency fund (approximately 50% of my salary ~ a year of necessity costs) goal in one year using this method.
• More Information: Started with 10% of salary and used this in conjunction with "ramping up" to reach goal.
  
• Have been steadily contributing to Roth IRA, 401k, personal stocks as well as discretionary funds with this method.
• Has worked great so far and has needed little adjustment (except for when there is unexpected income increases).
  

II. What is Automatic Accounting? (Introduction)

A. Automatic Accounting - A hands off approach to schedule fixed income transfers to various checking, savings, and investment accounts to reach a predetermined financial goal.
B. Summary: "Set it and forget it".

III. Why Automatic Accounting?

A. Benefits of using Automatic Accounting

1. As with most "automatic" things in life, allows less work to be done after initial planning/set-up to obtain financial goal.
• Allows consumers to create a plan and put it in motion automatically which typically helps people to stick to their plan because it no longer requires added input.
  
2. Hands off approach and becomes something that is not thought about, just happens.
• Helpful to the person who has a hard time remembering to pay bills or attend appointments.
  
3. Helps to control the amount of discretionary spending done throughout the month since the consumer knows how much is being allocated to savings goals.
• Helps with prioritizing spending. Eliminates large amounts of money that sometime give the illusion that you have more discretionary money than you actual have.
4. Allows for abstraction of funds to break up all expenses into their individual accounts and deal with each separately.
• This is useful in the case that you receive a raise and want to start allocating money to a new account. Instead of having to look at all of your expenses/savings goals as a whole, you can decide how much more you want to contribute to each.
  

B. Scenarios that investment accounting would apply to.

1. The consumer who pre-allocates money to dedicated savings.
• It is imperative for the consumer to know where money they are allocating is going. This helps with prioritizing expenses and eliminate unnecessary spending.
  
2. The consumer who typically pays bills on pay day rather than due date.
• Paying bills on time rather than by the due date also helps with prioritizing expenses. This also helps to avoid late fees which take away from net income and is easily avoidable.
  
3. The consumer who has enough money to allocate towards a savings goal.
• The consumer must have a plan as to what goal they are trying to accomplish with the pre-allocated money. That way the consumer is able to achieve their goals in order rather than trying to accomplish too much at one time. This is also useful when a consumer is ready to begin reallocation of their income.

IV. How to Set Up Automatic Accounting?

A. Preparation

1. Develop a financial goal.
• A person must have an end result (realistic goals) to achieve with automatic accounting. (Ex. paying bills on time, eliminating debt, saving for car, home improvements, new clothes, etc.)
  
2. Calculate to determine savings per month to obtain financial goal by the estimated goal date.
• Once a goal has been determined, used financial calculators (http://www.bankrate.com ) to get an idea of how much you need to contribute to obtain your goal in the defined time on a monthly basis.
  
3. Discipline yourself to abide by plan to have allocated funds applied to financial goals.
• Once you have developed your plan and determined how much you need to contribute to accomplish your goals, go through the process of setting up the automatic accounting with each of your institutions.
  
4. Make arrangements with bills to pay bills on date that they are due.
• Sometimes, arrangements can be made with certain companies (credit cards) to adjust your due date for a bill so you can arrange your notification for that bill as well as your scheduled pay day to coincide.
  

B. Steps to Automatic Accounting

1. Step One: Develop the Goal
2. Step Two: Create Accounts (Savings, Checking, Investment)
   
3. Step Three: Setup Automatic Transfers
• Automatic Bill Pay (review statements each month)
  
4. Step Four: Monitor and Adjust

V. Exceptions to using Automatic Accounting

A. What to do with unexpected income or bonus?

1. Prioritize what to do with the money.
• Contribute extra to an account
• Create a new financial goal (by creating a separate account) and contribute
  
2. Reward yourself for sticking with a plan.
• Treat yourself for sticking to your plan
  

B. What to do with an unexpected expense?

1. Emergency fund.
2. Dynamic reallocation (by skipping a month to a non-necessary expense).
• Skip contributing to non-necessary (investment, savings, etc) to cover necessary expense.

VI. Summary

Automatic accounting requires discipline and patience. Rome was not built in a day and in most cases, we can not expect our financial goals to be achieved in a day either. However, by sticking with a sound plan and well thought out strategy, in a few years, one will see and enjoy the fruits of their labor.

With that said, I challenge each of the members that read this blog to make a promise to themselves to help someone learn at least as much as you know about personal finance and share it with others. I challenge you to help someone to make a better financial decision no matter what immediate impact that it may seem to have. It is up to us to make a change and today I am choosing to to make that change...

Stay Disciplined!