I’m lazy, you’re lazy, we all want to be lazy. It’s human nature to be lazy.
But you can be lazy and still get rich! All you have to do is pay yourself first.
Who wants to constantly think about making money decisions? We already have enough on our minds.
Successful businesses have systems in place to run efficiently. Successful people have an Automatic Money System in place that pays them first and makes them richer.
Treat your financial life as a business and invest the time up front to build an Automatic Money System that removes decision-making and sets yourself up for financial freedom and your ideal early retirement life.
Build your own Automatic Money System, pay yourself first, and become rich.
Parkinson’s Law Drains Your Money
In economics there’s an idea called Parkinson’s Law, which observes that work expands to fill the amount of time there is to complete it. For example, if you have a project due in a month at work, it will likely take you the entire month to complete it even if it was really only one week of work. It makes sense, we like to put things off if we can!
In personal finance, Parkinson’s Law applies to your money as well: spending rises to meet discretionary income. This is how high-income earners end up living paycheck to paycheck.
Without an Automatic Money System, Parkinson’s Law will inflate your lifestyle and kill your ability to achieve financial freedom.
Even if you are able to muster the willpower to resist Parkinson’s Law, you will be fighting an uphill battle that constantly requires you to spend mental energy making spending decisions when you could be focusing on more important areas of your life like your family and your health.
Creating a system to automate your investing will make it infinitely easier to hit your optimal saving rate and allow time to work in your favor and earn you millions.
Make Parkinson’s Law work for your benefit: put in place your Automatic Money System that takes care of saving and investing with no effort needed on your part, and your spending will adapt to what’s left.
Analysis Paralysis
There are a million ways to make money through investing. The key to being successful is to educate yourself, pick your strategy, and just get started. Let your Automatic Money System take care of the rest of the heavy lifting!
The worst thing you can do is be caught by analysis paralysis, not investing, and never let your money work for you.
There is a plethora of free financial education (like The Rich Henry!) on the internet. Improve your financial literacy to feel a huge boost in confidence knowing you have control over your financial future.
Educate yourself, choose an investment style and strategy that works for you, and stick with it.
A Proven Path To Wealth
Let’s look at a proven stock market investing style: long-term buy-and-hold investing.
Finance leaders such as Warren Buffet and Jack Bogle (founder of Vanguard) believe that low-cost, diversified stock index funds are the most sensible investment for the vast majority of individual investors like you and me.
If we invested in the stock market over 1-year, 5-year, 10-year, and 20-year periods, how would we do?
Let’s see below.
Source: The Measure of a Plan
While returns for 1-year periods can be significantly positive or negative (want to lose 37% of your investment in 1 year?), the annualized returns across 20-year periods are all positive (from 0.5% to 13.2%)… meaning you would have never lost money if you held on.
If history has shown that it’s almost impossible to lose money over a 20+ year period in the stock market, why wouldn’t you adopt a long-term investing strategy where you are almost guaranteed to win?
You make money in the stock market by regularly investing and staying invested over long periods of time. Allow your Automatic Money System to remove decision-making and build you massive wealth through the stock market.
Set It And Forget It
Fidelity is rumored to have done a study that found clients with the best stock investment portfolio returns either forgot about their accounts or were dead!
Every year, millions of investors underperform the overall stock market because they try to time the market. We are our own worst enemies when it comes to investing.
The S&P 500 has returned a whopping 17,715% since 1930! To put that into perspective, every $10,000 invested would have turned into over $1.8 million with the same purchasing power (real returns adjusted for inflation) by 2020!
However, if you take out the 10 best days in the stock market during every decade, that return drops to a measly 28% (on the flip side, if you take out the 10 worst days every decade, the returns increase drastically to over 3,793,787%).
S&P 500 Inflation-Adjusted Returns Since 1930
Source: Bank of America
Investors who try to time the market let their emotions sabotage their results. They buy at the top due to greed (fear of missing out) and sell at the bottom due to fear. The irony is by trading in and out of the market to get better returns, they actually get worse returns!
Nobody can predict what will happen in the stock market. Don’t try to time the market.
Investors who stick with a long-term approach in their investment strategy always come out ahead. They used their Automatic Money System to consistently invest and stay invested through the good and bad days (mostly good) and were rewarded with great financial returns.
Time in the market beats timing the market. Your Automatic Money System and long-term investing strategy is your secret to building wealth in the stock market.
Build Your Automatic Money System
Let’s get to the fun part: building your Automatic Money System.
Your Automatic Money System is your financial plan to become rich.
In the old days, you would have to use an Excel spreadsheet to keep track of your finances. Nowadays, life is much easier with all the free financial tools out there to track your finances like a hawk and self-manage investment portfolios without having to pay excessive fees to financial advisors.
While you’re sleeping, spending time with loved ones, or experiencing life, your Automatic Money System will be running on autopilot in the background 24 hours a day, every single day, to make you richer.
Step 1: Choose Your Financial Settings (Earn More Than You Spend)
Choose your financial settings by creating a spending plan that divides your income into necessities (fixed expenses), savings (investments), and fun money (anything discretionary that you enjoy).
Then analyze your spending on necessities, the recurring fixed expenses such as housing, transportation, and food. Focus on your largest fixed recurring expenses. Can you cut spending in any of these areas that will make a big impact?
The lower your recurring fixed costs are, the easier and more stress-free your financial life will be. Lifestyle inflation is a one-way street, the lower you can start your fixed expenses, the more effective your Automatic Money System will be. It’s easy to add expenses to your life but much more difficult to get rid of them.
Personally, based on my optimal saving rate, I aim to keep my fixed living expenses at 30% of after-tax income.
Yes, my savings rate is high but it’s 100% achievable and it starts with keeping fixed costs low. Even if you are in a HCOL area, there are a lot of creative ways you can reduce your cost of living like local geoarbitrage (and tax-arbitraging) within your own city to reduce your fixed costs.
Remember Parkinson’s Law can work in your favor. By setting an income spending plan, you never have to worry about saving because your system will do it for you, making you financial progress every day.
- Note: If you can’t hit your target saving rate and you can’t cut your fixed expenses any lower, you might have an earning problem. Achieving financial freedom requires both offense (earning more) and defense (managing spending).
Step 2: Set Up Your Money System (Automate Investments)
Remember your Automatic Money System is designed to pay yourself first.
Life today is much easier with all the free technology and financial tools, use them to your advantage. I find it easiest to have one checking account for all your personal income that effortlessly executes your spending plan from Step 1.
For all income that comes in, first set up automatic transfers into your investment account based on your pre-set savings rate. Pick the method that works for you but most people who are W2 employees and are paid twice a month can choose to invest all from one paycheck or split it between both paychecks, as long as you hit your savings rate target.
For necessary fixed living expenses, set up automatic rent / mortgage payments on the last day of each month (before payment is due on the 1st) and use the paycheck in the middle of the next month to pay off the remainder of your fixed living expenses (transportation, food, etc.) and credit card balance that wasn’t covered by the last paycheck.
- Note: When first starting your Automatic Money System, if you don’t already have some cash saved, you may have to direct some cash (from investments) to build up a living expense fund (~1 month of cash in a checking account) to cover living expenses between paychecks.
- In addition to your living expense fund, having a rainy-day fund (a few additional months of living expenses in a high-yield savings account) may be helpful if an “emergency fund” provides you with peace of mind.
Using your Automatic Money System, savings/investments are automatically taken care of, housing expenses are paid at the end of every month, and you will know how much remaining fixed expenses will need to be paid by the middle of the next month. All your leftover fun money can be spent on whatever you please, guilt and stress-free!
- Pro Tip: Set up automatic 401K contributions or other retirement contributions that take full advantage of the maximum limits to reduce taxable income (and hopefully earn some free employer match as well). This way you never have to think about contributing to your retirement accounts because it’s taken out of your paychecks automatically!
Make your financial life simple. No matter how busy, distracted, or stressed out you are, your Automatic Money System will be working hard in the background, pushing you towards financial freedom.
Step 3: Protect Your Money System (Don’t Take Unaffordable Risks)
One final step: always protect your money system. Never take unaffordable risks (no matter how rare) that can wipe out all progress you’ve made and set you back years in valuable time.
I’m not talking about buying insurance on your phone in case you drop it and crack the screen. I’m talking about the unpredictable events (black swans) that have very small chances of happening but can ruin your financial life:
- A long-term injury that disables you from work (protect yourself with long-term disability insurance)
- Your child gets into a car accident that results in a multi-million dollar lawsuit (protect yourself with umbrella liability insurance)
- Getting a cancer diagnosis while you’re in between jobs (protect yourself with appropriate health insurance)
- Accidentally causing a fire that burns down your house (protect yourself with homeowner/renter’s insurance)
- Passing away and leaving a family behind without the main breadwinner (protect your family with term life insurance)
Unlike dropping a phone and having to pay for a new screen, which is an inconvenience, you cannot afford to self-insure against financial catastrophes.
Yes, I always decline the extra insurance when buying a new phone because in the long run, it’s cheaper to pay for any damage out of pocket (plus I’m careful with my phone).
However, not paying to properly protect yourself against financial catastrophes is the definition of being penny-wise and pound-foolish. Buying proper insurance is one way of using money wisely to protect the time you’ve saved and give you peace of mind for risks you cannot afford.
Protect the nest egg that you build using your Automatic Money System.
Never work for the same money twice.
Beauty In Simplicity
That’s it! 3 steps for creating your Automatic Money System. Yes, we can get into the nitty-gritty of every single detail, but there is beauty in simplicity.
Getting rich is simple, but not easy. It takes effort but you don’t have to be special or extraordinary to become rich.
All HENRYs have the opportunity of a lifetime to use their incomes and their Automatic Money System to secure their financial freedom.
Why not set yourself up for success? Front-load the effort to build your Automatic Money System now and set yourself up to achieve financial freedom.
At a certain point in your financial journey, it will be time to change the settings on your Automatic Money System and shift your focus to buying back time and living your ideal life.
Until then, keep your settings for achieving financial freedom simple: earn more than you spend, automate your investments, and never take unaffordable risks.
Use your Automatic Money System, pay yourself first, and become rich.