Almost 2 years ago, when I was figuring out my financial future, I decided to put a 401k in place for our business. I chose this retirement vehicle because it seemed to offer the best tax-advantaged strategies to saving for retirement.
When I set up the 401k, I did not contribute much each pay period, instead opting to save up and then pay myself and my wife a lump sum bonus at the end of the year. I then deferred that bonus into our 401k, making sure to max it out to the yearly limit.
My thinking behind this was that since I am never sure how much I will make from month-to-month, I didn’t want to fall short on the business cash flow just to save for retirement. In theory, this was a solid idea. Protect the cash flow. Rule number one for staying in business. In practice however, it lead me to stash a large amount of cash into a savings account, and then worry for several months about whether or not I would need to dip into it to cover business expenses. Also, I was making zero dollars in interest, while the market steadily made gains.
There had to be a better way.
I had to find a way to worry less and still save for my early retirement goals. At the start of the next year, I decided to divide the max contribution out over 24 pay periods ($18k/24 = $750), and then from my paycheck defer that much towards the 401k. I did the same thing with my wife’s paycheck, and just like that, we were investing $1500 per pay period.
And as far as cash flow goes, I was already putting that money into savings, so it didn’t affect our business one bit. And since we deferred some from each paycheck, we began living on a little less. We had to cut back slightly on some household expenses, which is always a good thing to do.
Now this may not seem like rocket science, and surely it isn’t. But over the past 16 months, automating my investing has eased my worry and unloaded my concern about putting money into the 401k. I have not thought about this retirement vehicle for several months, and have freed my mind to focus on other aspects of my life and finances. And instead of earning 0% interest in a savings account, it has gained a healthy 16% interest since we started the plan.
Automated investments move the money before I even see it, in essence allowing me to recommit myself to my own financial vision every couple weeks. I don’t even think about spending the money because it’s never really in front of me. However, if I ever hit a speed-bump in our practice’s collections, I can easily suspend contributions to the accounts; or if things really go south, the funds in the 401k could act as a last-ditch emergency fund.
Automatic investing has helped me stay focused on my long-term goals, without my short-term self getting in the way.