A quick note: the information below, most notably the apps and services, is meant to be educational and not specific advice to any individual.
I’m betting you know this part already: you are human. The fact is, as any pilot knows, humans are prone to error. The bigger problem is that, as humans, we are even more prone to mistakes or neglect in our financial lives than we are in the air. If your human tendencies don’t serve you well in the financial world, what does work? I suggest setting up your financial life so that the three main areas of your cash flow (your savings, your bills, and your investments) operate on autopilot.
Here’s how to do it.
Putting your financial life on autopilot ensures better outcomes
Let’s be honest for a minute. When you are doing your checks, answering radio calls, etc., what does a better job of holding altitude – you hand-flying or the FMS? Even if you do a perfect job, the amount of concentration and effort it takes makes it more likely that, at least once in a while, you will make a mistake.
Your finances are not so different. When you try to hand-fly your financial life, you can often either forget to make sound, necessary decisions or you make poor decisions. The solution? You need to automate your finances. Here’s why it makes sense.
What happens when you automate your financial life?
How is your life better when you start putting much of your financial life on autopilot and what are the outcomes?
Reduced workload. Humans suffer from decision fatigue throughout the day. In other words, the more decisions you must make, the more mental fatigue you experience. Should I save this month? How much? Where to? What bills are coming due? How should I invest this money? By setting these recurring decisions on autopilot, you don’t have to worry about any of it in the future.
Enforces discipline. In the game of money and building wealth, discipline wins. Always. When you automate your financial life, you’re committing your future self to doing the right things because you’ve made the correct decisions in advance. You won’t have an opportunity to do the wrong thing (e.g., blow your profit sharing instead of putting it in savings) because it will have already been set to occur. It also prevents you from making a gut reaction decision that may be wrong (e.g. selling your investments when they drop in value based on a reaction to the present time).
It works. Those who automate their savings, bill payments, and investments end up far better off financially than those who don’t. I’ve seen it every day for over 15 years. Whether it’s the automation itself or the results of the automation, those who set their financial lives up on autopilot have greater peace of mind.
The three areas you should automate
I believe every pilot (and, frankly, every person) should automate three areas of their financial lives:
1. Savings (when, where, and how much)
2. Bills (to whom, how much extra)
3. Investments (what types, what risk, what targets)
Put your savings on autopilot
You simply cannot build wealth without saving money. Saving money means putting some of your paycheck away every single month, at the beginning of the month. If you wait until the end of the month to put some away, it’s highly likely there will be nothing left.
Smart pilots automate their savings by arranging for a portion of their pay to go immediately and directly to a separate savings and/or investment account before it ever hits their checking account. In other words, talk to your HR rep and set up an automatic transfer of part of your pay from your company to your savings or investment account from every paycheck.
How much? Start small if you need to. Once you realize you don’t miss it, increase the amount. If you want to have a chance at financial freedom, you should have 10% of your pay going to freedom. If you want to lock up financial freedom, you should work your way toward having 20% to 30% going into savings (depending on how much your airline/company contributes on your behalf).
Put your bills on autopilot
The only thing worse than paying bills is having to take time away from your family, your work, or a hobby to pay them. (Of course, forgetting to pay bills is worse than either). When you set your bill payments up on automatic payment three things happen: 1) you don’t have to take time out of your life to make the payments, 2) the bills always get paid, and 3) you have more free mental space to focus on other things.
What’s more, many companies give you a discount for setting your bills to pay automatically. For example, many cell phone providers will take $5 a month (or so) off of your bill if you set up automatic payments. Most lenders (student loans, car loans, etc.) will reduce your interest rate by a small amount (often 0.25% annually) if you set up automatic payments. Give it a try, it works.
Put your investments on autopilot
Pilots are incredibly good at following systems and processes when they fly. In my experience however, we aren’t much better than anyone else at following systems and processes when it comes to our investments.
Making bad investing decisions can wipe out a lifetime of savings. Some of the worst decisions come from overconfidence, (“I know what I’m doing,”) invulnerability, (“It won’t happen to me,”) and letting emotions take over when the markets are behaving crazily. The best way to combat these errors in decision making and reduce a significant amount of your workload is to put your investments on autopilot.
The best way to automate your investments is to remove yourself from the decision process and ensure that your accounts are being adjusted appropriately throughout the year. There are four main ways to accomplish this.
Automated Investing Platforms. Automated investing platforms are investment management firms that are “no frills” and provide little advice, but they do manage your portfolio day-to-day for you. Most use low-cost, index-based mutual funds or exchange-traded funds, which, for most people, make the most sense. The major benefit is that these automated investment platforms are low-cost (often less than 0.35% a year of your account value) and take care of all of the management for you. These are best used outside of your 401(k) or retirement plan, so consider them for your IRAs, Roths, or regular investment accounts. Ones to research are, Acorns, Betterment, and Wealthfront.
Target Date Funds. Target date funds are mutual funds that automatically invest and adjust your money for you based on a specific target date in the future. Just about every retirement plan has these, and they are my favorite way to put a 401(k) on autopilot. While there are differences among them, these funds generally invest your money so that it moves more conservatively as you get closer to your target date (often your retirement/age 65 date). Throughout each year they maintain the right balance of stocks, bonds, and other investments so you don’t have to worry about them. You can identify them in your retirement plan by looking for the investment options that end in a date (such as “Retirement 2050”). Even though these funds are popular inside retirement plans, you can use them outside of those, as well.
Allocation or Balanced Funds. Allocation, or balanced funds, are similar to target date funds in that they will maintain an appropriate mixture of investments – and adjust as necessary – throughout the year for you. The difference is that you generally select one based on a level of risk or aggressiveness versus a date. For example, you might select a fund that is designed to be moderately aggressive, which generally aims toward the higher end of risk. More risk often means more return over the long-term, but greater temporary losses over the short and medium terms. These aren’t as automatic as automated investment platform or target date funds, but they do take the work and the decisions of day-to-day management off of your hands.
Professional Management. As your wealth builds over time, you often find you need (or want) more than just management of your investments. You may need guidance on estate planning (wills, trusts, etc.), taxes, insurance, retirement planning, income, and so on. When that becomes the case, a high-quality fiduciary financial planner (someone who has a legal obligation to act in your best interests at all times) is a good option. Not only can a planner guide you on the items above, but he/she can automate your investments in a way customized to your situation. Not everyone needs (or benefits from paying for) professional management, but those who do may find it worthy of research.
What’s the best part of automating your investments? I can tell you from experience (and please do your own research on the topic) that those who put their investments on autopilot have far better returns on their investments.
Your investments are a major part of your financial life, so make sure you do what you need to do and make the right decisions!
We aren’t quite to the point where we can program our ultimate financial destination and have our lives operate perfectly on autopilot, but there are several things you can do to make your financial life much easier and much more fruitful. Take the time to put your savings on autopilot, pay your bills automatically, and make sure your investment strategy happens correctly and without needing your intervention. Doing so will stack the odds in your favor when it comes to building wealth!