- [Thomas] This video is sponsored by Curiosity Stream.
You can watch a full-length companion video to this one
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Hey, what's going on, friends?
So in this video, we are talking about something
that I haven't covered on this channel in quite some time,
which is personal finances.
Specifically, in this video,
we are gonna talk about the single habit
that more than any other
allowed me to save up around $300,000
in my various investment accounts,
over the last 10 or so years
since I started investing money back in college.
Now that number on screen right there
is not intended to be a flex of any kind,
and it's also very much not intended
to be something you should be comparing
your own financial situation against.
The only reason I am putting that number on screen right now
is to give a specific and concrete example
of just how powerful the concept
and the habit that we're gonna talk about today is.
And that habit is called financial automation,
or automating your finances.
This is something I talked about in my recent video
on seven books everyone in their 20s should read.
And I had a few people asking me to explain it
in a bit more detail.
So that is what I'm doing in this video.
So essentially, automating your finances
means first identifying the habits and the actions
that you need to take to meet your financial goals,
be it buying a house or getting out of student debt
or saving for retirement,
and then taking those actions and handing a lot of them off
to a robot.
Or to be more accurate, to a computer
or a piece of software or a website
that takes care of these actions for you.
So in this video, I'm gonna teach you
exactly why financial automation is so powerful,
why I practice it in almost every area of my life
where I can do it,
and we're gonna go through specifically
how I automate my own finances in two key areas,
bill automation and investment automation.
So first, let's start with the why.
Why do you wanna go through all the trouble
of setting up financial automations?
Well, there are a couple of key benefits here.
Number one, you get access to a safety net
and to huge peace of mind,
because when you automate your finances,
you will never miss a credit card payment.
You'll never miss a bill payment.
If there's something you are supposed to pay,
it is going to get paid.
Even if you're on vacation or you forgot to do it,
or I dunno, for some reason,
you're a sentient bear watching this video
and you're gonna go hibernate for the winter
and sleep for three months.
Doesn't matter, your stuff is getting paid.
Additionally, when you automate your savings
and your investments, your consistency goes way, way up.
And as a result, you're almost certainly going to invest
and save a lot more over the course of your life.
In fact, that is the reason I've been able to save
more than $300,000 over the past 10 years.
Back when I was a sophomore in college,
I opened my very first investment account over at Vanguard.
And because I had read about financial automation
in that book that I recommended
in a very recent video of mine,
"Your Money: The Missing Manual" by J.D. Roth,
I set up an automatic deposit from my bank account
to that investment account every single month.
Now at the time it was very small.
I think I started out with 50 bucks a month going in there,
just a little bit of money from my part-time job
being invested.
But over time, I increased those amounts.
And as I got into my career,
they became significantly larger.
And the most important thing is that
they were happening every single month.
And this consistency can be incredibly powerful.
And I wanna give you just a small example of that.
Say I would have started investing
when I was a baby, back in 1991.
Super smart baby Thomas.
And I was putting $500 a month into
essentially the entire stock market,
an index fund that tracks the entire stock market.
That's $500 a month which adds up to 6,000 a year
or 180,000 over the course of the last 30 years,
from 1991 to 2021.
But if they had done that consistently
and they never took any money
out of the market in the meantime,
their money today would be worth $1.6 million.
Imagine, saving 180,000 and turning it into 1.6 million.
It sounds crazy, but it's actually something
that can be done quite reasonably
by leveraging compound interest
and by being consistent in your savings.
And think about the person who is doing this manually.
If they're going in every single month
and making the decision to invest in the market
or to move money from their checking
to their savings account,
that's 12 times a year they have to go in
and manually do that, which means that
they are potentially setting themselves up for failure
every single time.
They might forget, they might be on vacation,
or they might justify to themselves
that they need to spend the money
on something else this time,
and hey, I'm just gonna get back onto it next time,
I totally swear, man.
That's one month they missed
the robot certainly wouldn't miss.
So for these reasons,
I think learning to automate your finances
is one of the most important personal finance habits
that you can learn.
But there is at least one preliminary step
that you should understand and make sure you have taken
before you start doing it,
especially when we're talking about investing.
And that is establishing what is called a cash buffer.
And to explain that, I actually wanna show you
something that I've been developing in my spare time
called the Personal Finance Tech Tree.
So I grew up playing games like Civilization,
where they had these tech trees.
You had to learn things like metallurgy
before you could learn ballistics, things like that.
And I've always thought about my personal finance journey
in a certain way that's kinda similar to that.
I have to do certain things,
either learn certain things
or hit certain financial milestones
before I can move on to the next thing.
So I've been thinking to myself,
could I create a sort of actual map
for these different financial milestones?
And I've been working on this in a tool called Whimsical
that I'm gonna show you here.
So basically I have these little mapped out paths here
for things like savings, regular income,
installment loans, and basic budgeting.
But the specific part that I want to zoom in on right now
is the one month cash buffer.
This is what I think you should establish
before you start automating your finances.
And we can see here that this leads to
first, a three month cash buffer,
and then to the start of your investing journey.
But the real reason you wanna make sure
you have a one month cash buffer is
if you are automating your investments,
you're automating bill payments.
You're automating deposits from your bank account
into maybe an investment account or a savings account,
and you don't want those automations
to draw your bank account down below zero.
So essentially, a one month cash buffer is
a buffer of cash for one month's expenses
beyond what you're going to spend this month.
And when you have established that in your bank account,
you can be sure that your current expenses,
your bills, your investments, your savings,
your debt payments,
are never going to draw your bank account down
to a negative balance.
Once you've hit that milestone,
I think it's a very good idea to start looking at
how you can automate different parts of your financial life.
So let's now talk about how I automate
the bill payments in my life.
Basically, anything that is a regular monthly payment
I have on autopay, if I can do it.
So that includes my mortgage, that included my rent
when I was paying rent for an apartment,
that includes my utilities payments.
So internet, gas, electric, water,
and that includes every credit card that I have.
And to go on a bit of a tangent about credit cards
for a second, I do not use credit cards as credit cards.
So your credit card gives you access to credit,
which you might even be able to tap
even if you don't have that much money on hand.
I do not view credit cards that way.
For me, a credit card is simply a pass-through vehicle
for money that I already have
and I was already going to spend.
I simply use credit cards to get access to airline points
and different perks and to build my credit score over time.
And I always, always, always, always
pay off my credit card's balance in full
every single month.
I have never once paid a cent of interest
to the credit card companies,
and I think that is a goal that all of us should aspire to.
The credit industry calls people like us deadbeats
because we don't make the credit card companies
a whole lot of money.
And I think everyone should aspire to be a deadbeat.
That being said,
maybe you have some credit card debt right now
that you can't pay off in full,
but what you should at least do is what I do.
Go into your credit card and enable autopay.
At the very least for the minimum payment.
And the huge reason for this is that your credit score
is determined by several different factors,
but one of the biggest is
your percentage of on-time payments.
And even one missed payment can be a huge ding
to your credit score.
So I always autopay my credit cards
because it is a safety net.
Even if I get knocked out for two months for some reason,
or I get lost in the jungle for some reason,
my credit card is going to get paid
because the autopayment is set up.
The other area where I use financial automation in my life
is with my savings and my investments.
So I have some automatic rules with my bank account
to have money transferred from my checking to my savings
every single month.
And then I have some different investments
that are automatically funded and deposited
every single month as well.
The main one is my 401(K) through my company.
That money goes into the 401(K) account
before I even pay myself my payroll.
And if you work for a company that offers a 401(K),
it's a very good idea to do this.
Especially if they offer matching,
because that's essentially free money.
And then I also have a few different
taxable investing accounts,
basically non-retirement accounts,
that I automatically invest into as well.
Now there are some good habits to practice
in addition to financial automation
that are gonna make sure you don't run into problems
in the future.
And I think the first one is to put bill due dates
on your calendar.
You at least wanna know
when your bills are going to be charged,
even if they are automatically being taken
out of your account.
You basically wanna stay on top of your finances.
And the second big habit actually
kinda goes into the exact same idea here.
It's to do what's called a monthly review of your finances.
Essentially, the robots are taking the actions for me,
but every single month, I'm coming in
and I'm staying on top of all of my accounts.
I'm making sure I know where all my accounts are,
how much money I have, and overall,
I'm making sure that I have a clear picture
of my personal financial health.
I think only a fool sets up machines
and then doesn't check up on them every once in a while.
So by checking up,
and by making sure I know everything that's going on,
I prevent myself from getting blindsided.
In fact, I take this one step further.
I don't just check over my balances.
I actually have a custom-built spreadsheet that I made
to do some financial planning,
to actually look over my average income,
my average expenses,
my average savings and investing goals.
And I even have formulas that will show me
how much roughly I'm gonna pay in taxes,
what my take home pay is gonna be,
and my percentage is split between
how much money I'm spending on my car, my housing,
how much I'm saving, and how much I'm investing.
I even turned this into a completely free template
that anybody else can download and use.
But what I haven't done up until this point
is actually make a video showing exactly how I use it
and how it works.
So I have finally done that,
I've made a complete and full-length companion video
to this video, going into how I use this template
and how I plan out my financial decisions,
and I've uploaded it to Nebula.
In case you haven't heard,
Nebula is a streaming service built by both myself
and a ton of other fantastic educational creators.
And on Nebula,
I upload my videos that you see here on YouTube,
both early and completely free of ads like this one.
It's also a place where we can experiment with content
that might not work very well on YouTube,
such as, I don't know,
a long and in-depth video on my budgeting strategy.
And there's a ton of other great exclusive content on Nebula
as well from a ton of creators that I personally love.
My friend Ali Abdaal for example,
has a series called Workflow where he goes in depth
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And Real Life Lore, one of my absolute favorite channels
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It is just as long and high quality as a normal video is,
but it covers some more controversial topics
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things like that,
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It's a really interesting series,
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Thanks as always for watching.
Hopefully you found this video helpful.
Hopefully you learned something new,
and if you did, hitting that like button for the algorithm
would be much appreciated.
Thanks again for watching,
and I will see ya in the next one.