How can entrepreneurs and freelancers with irregular income automate their money?
Lots of people have been interested in the section of my book on irregular expenses and income — like entrepreneurs or freelancers –so I thought I’d go into some more detail on how I handle automation.
Brian D. writes:
I’m just wondering when you deposit money into your account does it automatically put 5% into savings, 10% into 401(k) …etc or is this a manual process. Also when the 5% goes into savings do you automatically split that into your savings account sub accounts, or is this manual?
Brian probably read my monster post on The Psychology of Automation: Creating a Bulletproof Personal-Finance System, which included this image:
Here are the answers:
1. It’s automatic (see how to automate it). But in your sub-savings accounts, you have to specify an absolute number, such as “withdraw $150/month from my checking account and put it in my sub-savings account for the new iPhone”)
2. Brian then wrote a followup: “What if you got $500 for your birthday and deposit this into your checking. Does it automatically spread itself out or do you do this manually?” While my bank (and most) require an absolute number, you can still semi-automate this. I deposit the money into my checking account, as usual, and then execute a monthly sweep on the 25th of each month, where I tidy up all loose ends.
You’ll remember my sub-savings account (how to use a sub-savings account):
Here’s how the monthly sweep looks in Google Calendar:
Note that I don’t recommend you sock away 100% of unexpected earnings. In fact, I force myself to spend 25%-50% of any unexpected money within a month, a technique I developed to keep motivating myself to earn unexpected income. (For that, I keep a “tobuy” tag in delicious.)
Just like GTD, the key with your personal finances is to set up structures to catch the wild one-offs and put them aside for a regularly scheduled time, usually once/month.
Once you set this system up, your money will flow from your paycheck to your investment accounts (401(k), Roth IRA, etc), sub-savings accounts (like for the new iPhone), and down to your checking account for guilt-free spending — all automatically.
Read more about automating your money.
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