Quick reads...

7 Places Your Money Needs To Go Automatically if You Want to Build Wealth

By: David Bach  |  Last Updated: February 19, 2021
Financial Expert & 10x New York Times Bestseller
IN THIS ARTICLE1. Fund a retirement plan
2. Send the rest of your paycheck straight to your checking account
3. Fund your emergency account
4. Fund your dream account
5. Pay your credit card minimums (at least!) automatically
6. Pay your regular bills automatically
7. Give to charity automatically

Building wealth doesn’t require as much effort as you may think. In fact, if you take an hour or two out of your day to make an automatic plan for your financial life, it could help you become a millionaire. 

What do I mean by a plan that is automatic? It’s a plan that, once you’ve set it up, allows you to go about your daily life and not spend any time thinking about or worrying about your money.

If you’re ready to become an “Automatic Millionaire,” follow the blueprint below. It highlights seven places your money needs to go right now if you want to build financial security for life.

1. Fund a retirement plan

Whenever your paycheck lands, the first thing you need to do is pay yourself first — and what I mean by that is, whenever you earn a dollar, the first person you pay is you. The simplest way to do that is to set up a system so that a certain percentage of your paycheck gets deposited directly into a 401(k), 403(b), IRA (individual retirement account) or similar retirement savings account.

Ideally, I want you saving a minimum of 5% of your income in a retirement plan and working your way up to 10-15%. That said, it’s OK to start small and gradually get to where you need to be. Even if the best you can do is to save 1%, don’t let that stop you from starting. Anything is better than nothing. At the same time, try to be ambitious. However much you think you can afford to save, do more: If you think you can save 4%, save 6%. If you think you can save 10%, save 12%. Most of us tend to underestimate how much we think we can manage. 

If your company offers a 401(k) plan, enroll in it immediately if you haven’t already done so. This is an incredibly easy way to pay yourself first, as your company will automatically deduct your contributions from your paycheck. Some companies will even match your contributions up to a certain amount, which is essentially free money. In 2021, you can contribute up to $19,500 in an employer-sponsored 401(k) plan.

If your company doesn’t offer a 401(k) plan, you still have options: You can open a traditional or Roth IRA and contribute up to $6,000 in 2021. Like a 401(k), these accounts offer major tax breaks. If you’re self-employed, you can open a SEP (simplified employee pension) IRA, which allows you to contribute as much as 25% of your gross income up to a maximum of $57,000 a year.

2. Send the rest of your paycheck straight to your checking account

Set up direct deposit with your employer if you haven’t already done so. This way your paycheck will automatically land in your checking account, saving you the step of having to deposit a physical check.

Now that you’re paying yourself first in a retirement account and sending the rest of your income straight to your checking account, it’s time to automate everything else.

3. Fund your emergency account

Having a cash cushion to fall back on if you lose your job or rack up a large medical bill is more important now than ever. I recommend having at least three month’s worth of expenses set aside in an emergency fund. Figure out what you spend each month, multiply it by three and start working toward saving that amount.

The more you can save for a rainy day, the better. The exact amount that makes sense for you ultimately depends on what you feel you need stashed away in order to sleep well at night. You might want more during unprecedented times like right now —evaluate where you stand and think about how much you want in cash to feel safe during the Covid-19 pandemic.

Put this money in a separate account and keep your hands off of it unless you’re dealing with an actual emergency. I recommend keeping it in a high-yield savings account, where your money will be accessible and, at the same time, earn more interest than it would if it were just sitting in a traditional savings account. 

While “high” is a relative term these days, as interest rates have plummeted, you can still find some savings accounts out there with appetizing yields, especially compared to the national average interest rate on savings accounts (0.05% as of October, according to the FDIC). Many of these are from online banks, which are just as legitimate (and FDIC-insured) as their brick-and-mortar counterparts.

There’s Synchrony, which is currently offering a rate of 0.55%, and Marcus by Goldman Sachs (the consumer arm of the storied investment bank) is offering 0.50% APY.*

The easiest way to build this fund is to automate your savings: Set up a recurring deposit from your checking account to your emergency account. If possible, save 5% of your paycheck per month.

One more thing to note here: If you’re in debt, build up one month’s worth of expenses in this account and then shift your focus to paying down your debt. Once you’re debt-free, you can work on boosting your emergency fund and getting it to where it needs to be.

*Note that APYs listed are current as of the time of publication and may fluctuate.

4. Fund your dream account

If you don’t actively save for your dreams, you may never make them reality. Think about your big dream — it could be a home or a vacation, or maybe you want to quit your job and travel the world —and start saving automatically for it. 

The type of account you want to open for your dream fund depends on your time horizon, so first I want you to categorize your dreams as being either short-term, mid-term or long-term. Short-term dreams are those that can be accomplished within a year or two, mid-term dreams take between two and five years and long-term dreams require more than five years. 

Where to invest your money for short-terms dreams

If you’re saving for a short-term dream, such as going on a vacation or redoing the kitchen, you need to keep your funds as safe and liquid as possible. One option is to put it in a high-yield savings account, which we discussed above. (If you go this route, just make sure to keep your dream money separate from your emergency money.)

Other options include opening a money market account or a CD (certificate of deposit). With a CD, you deposit a fixed sum for a fixed term and then enjoy relatively high interest rates. Before the pandemic, rates on CDs were close to 2% or more. Now, they’re lower: Marcus by Goldman Sachs is offering 0.55% APY on 12-month CDs and Discover is offering 0.50% for the same term. (Again, APYs listed are current as of the time of publication and may fluctuate.)

A money-market account is a mutual fund that typically invests in very liquid, very safe, very short-term government securities. Your money will earn money with a competitive interest rate and it’ll still be easily accessible. Again, rates were higher pre-pandemic, but you can still find some interesting options. Check out Ally and Discover.

Where to invest your money for mid-terms dreams

For mid-term dreams (maybe you’re saving for a down payment), you have a little more time to play with, so you can afford to take a bit more risk (and, as a result, may get a bit more reward). Short-term bond funds (investments in short-term government bonds) are a good option for conservative investors who don’t want to risk anything happening to their dream money. But anyone who wants to see a little more of a return should consider what’s called a balanced fund.

Balanced funds are mutual funds that invest in both stocks and bonds. Generally, about 60-70% of a balanced fund’s assets will be invested in stocks, with the rest invested in bonds (usually Treasuries). As a well-diversified fund, it’s less risky than a pure stock fund. You shouldn’t expect a balanced fund to outperform the stock market — but it should come close to matching it. The bottom line: Investing in a balanced fund will give you slow and steady progress to where you want to go, without incurring a ton of risk.

Where to invest your money for long-terms dreams

When you are saving for dreams that will take you more than five years to reach, consider putting your dream-basket money into investments that are more growth-oriented. With the longer time frame, you can afford to take more risk in order to get a bigger return. That’s why I recommend that you invest in stock-based mutual funds for these dreams.

Start by investing in index funds. They’re simple, inexpensive, easy to set up and they work. Index funds are stock mutual funds that mimic a specific index. You’ve probably heard of S&P 500 index funds. These popular funds invest in the 500 stocks that make up the Standard & Poor’s index. You can look into the Schwab S&P 500 Index Fund and the Vanguard 500 Index Fund.

Another option for your long-term dream money is to invest it in exchange-traded funds (ETFs). At their core, ETFs are mutual funds that are traded like stocks, which means you can buy and sell ETFs during market hours in the same way that you can buy and sell common stock. These funds are liquid, tax-efficient and low cost. To invest in an ETF, you’ll open a brokerage account with a broker, like TD Ameritrade, E*Trade or Schwab, and then choose your ETFs, like the Vanguard S&P 500 ETF or the Schwab U.S. Mid-Cap ETF.

You can also explore robo-advisors, like Betterment and Wealthfront, which will automatically invest your money for you in ETFs. Check out my top recommendations for robo-advisor companies.

How much should you save for your dreams?

You should fund your dream account the same way you fund your retirement basket and emergency fund — that is, with a fixed percentage of your income that you automatically contribute every month. Making the process automatic is the best way to ensure you stick to your savings plan.

The size of your regular contribution should be determined by the likely cost of your dreams. As a rule of thumb, it probably should be at least 5% of your after-tax income. While 5% isn’t a huge amount, it is certainly big enough to create a very powerful long-term savings vehicle.

Of course, if your dreams happen to be really big, you may want to put away a larger percentage of your income. The key here is to realize that it’s up to you. The more money you put away, the faster your dreams will become a reality.

5. Pay your credit card minimums (at least!) automatically

If you use credit cards, set up automatic payments that cover at least the minimum amount due — that way, you’ll never be late. Schedule your payments five days before the bill is due, just in case.

Of course, you want to pay your balance in full every month to avoid ever owing interest. But by making at least the minimum payment every month, you’ll avoid late fees. 

6. Pay your regular bills automatically

While you’re at it, set up auto-pay for all of your recurring payments, including your rent or mortgage, car payment, cell phone bill, utilities and gym membership. Again, by doing this, you’re ensuring you’ll never miss a payment. 

7. Give to charity automatically

I truly believe that the more you give, the more comes back to you. It is the flow of abundance that brings us more joy, love, wealth and meaning in our lives. 

Arrange to automatically fund the charity of your choice through a series of small regular contributions — maybe 1-10% of your paycheck. If you plan to make a lump-sum contribution once a year, you may not get around to it, but if the process is automatic, you won’t put it off or forget about it.

Not sure where to give your money? Use Charity Navigator to learn about over 160,000 charitable organizations and find one that aligns with your values. You can also look into Donor-Advised Funds (DAFs), which allow you to make a charitable contribution, receive an immediate tax deduction and then recommend grants to your favorite charities over time. Think of it as a charitable investment account: You contribute money and your funds will grow tax-free, but instead of taking that money out for yourself, you use it to support any IRS-qualified public charity.

I think you’ll find that the more you give, the wealthier you’ll feel.

Read next: David’s 11 Money Tips to Start Living Rich Today