Make it Automatic: Six Tips to Help Put Your Finances on Autopilot

As seen on AOL’s walletpop.com:

Getting out of debt — and staying debt free — requires commitment, discipline and hard work. There are no shortcuts. But there is a way to make the job easier. It’s something that I have been writing, teaching and talking about for years now. If you want to success, you must make your plan automatic.

If you follow the steps I cover in this article, you will truly have a foolproof, no brainer, “set it and forget it” financial plan that, I promise you, will work. This plan is based on the one I laid out in my New York Times bestseller The Automatic Millionaire and I have a full chapter covering the details of these steps in my new, bestseller Debt Free For Life. The whole process should take no longer than an hour to get organized.

Read and follow these steps. It’s easy and, yes, you really can do it.

Are you ready? Then let’s go make it automatic!

1. Pay Yourself First Automatically

In my books, TV and radio appearances, and seminars I’ve always emphasized the importance of paying yourself first. This starts with having at least 5% of what you earn deducted from your paycheck and deposited directly into a 401(k), IRA, or similar qualified retirement account before the government takes its bite of withholding tax. Ideally, this deduction should total 12.5% of your income (the equivalent of one hour’s work each day).

Whatever amount you decide, just be sure to make the process automatic. If you’re not eligible for a 401(k) or similar program you’ll have to create your own “pay yourself first” program with the use of an IRA. Just tell the bank or brokerage where you have your IRA that you want to set up a systematic investment plan — where money will automatically be transferred on a regular basis into your IRA from some other source such as a payroll deduction or you use a free online bill-paying service that allows you to schedule regular automatic payments of specified amounts to anyone you want. Most banks and brokerage firms will handle all the arrangements for you, contacting your employer’s payroll department on your behalf and dealing with all the paperwork.

And yes, you should do this first step even if you are in debt. After more, than two decades of experience teaching people about money, I have come to believe with all my heart that it’s a big mistake to put off saving money until your are debt free.

2. Deposit your Paycheck Automatically

If your employer uses a computerized payroll system, you should be able to arrange with your company’s personnel or human resources department to have your pay automatically transferred directly into your bank account. This is known as direct deposit. It gets your pay into your account without delay — and saves you the trouble of going to your bank and physically depositing your check.

3. Fund your Emergency Account Automatically

I’ve also long advocated the importance of maintaining and emergency cash cushion of at least three months’ worth of expenses in an FDIC-insured bank account (not your regular checking account, but a separate one specially for this purpose). Until this emergency account is fully funded, you should have at least another 5% of your paycheck directly deposited into it. If your employer doesn’t offer payroll deduction, arrange to have your bank automatically transfer the money from your checking account the day after your paycheck clears.

4. Pay your Credit Card Bills Automatically

Call all your credit card companies and arrange to have all your bills come due on the same day of the month — ideally, 10 days after your paycheck is normally deposited. (Virtually, every credit card company will work with you to change your due date if you ask them.) Then use your bank’s online bill paying service to automatically make the minimum payment for each of your cards, five days before the bill is due. (If your bank doesn’t offer free online bill-paying, think about switching to one that does.) If you want to pay more than the minimum on any of your cards — and if you follow my DOLP plan, you will — you can write a check for the extra amount. Making your minimum payments automatic ensures that you will never miss a payment deadline and get hit with late fees or penalty interest rates.

5. Fund Your “Extra Payments” Automatically

In addition to making all your minimum payments automatically, you should also automate your “extra payments.” Based on your DOLP plan or “debt stacking tool,” you know now which debt should be your Number One priority. If you add just an extra $10 a day to the minimum payment or your Number One debt, that’s $300 a month that should be automatically added toward your debt each month. Arrange to have this amount (or whatever amount you’ve decided on) transferred automatically from your checking account to the appropriate loan account until it’s paid off. Once you’ve automated this debt down to nothing, you should automate your Number Two debt. And so one — until all your debts are paid off completely. The same goes for your mortgage. If you add something extra to your mortgage payment, make that automatic too.

6. Pay off your Monthly Bills Automatically

There are two kinds of monthly bills: regular ones that are always the same amount (like mortgage, rent, or car payments) and those where the balance due varies (like phone bills, electric bills, or cable and Internet charges). You can automate payment of the bills that are a fixed cost by using your bank’s online bill-paying service to have them automatically debited from your checking account each month. And you can automate payment of the variable ones by arranging to have them charged to one of your credit cards. As long as you keep your checking account adequately funded and you have sufficient credit available on your card accounts, this will protect you from ever missing a payment due date. My entire financial life is automated this way. As a result, all my bills are always paid on time, whether I am in town or not, and I never get hit with late fees or penalties.

You now have the information to make your financial life automatic — Congratulations! It’s now time to put this information to work, and in doing so you will be taking a major step toward getting your finances under control and becoming Debt Free For Life!

If this is the first article of mine that you have read — you should know that you just caught the tail end of my 10 Weeks to A Debt Free Life Series! You can also visit finishrich.com for more information to help guide you to financial freedom, and make sure to join me on Facebook, where you can ask questions, read articles, and share your thoughts with like-minded individuals.

How to Pay Off Your Home Faster in Five Steps

As seen on AOL’s Walletpop:

For homeowners, the key to becoming debt free for life is paying off your mortgage as quickly as possible. Of course you can’t even think about doing that unless you have the right kind of mortgage — which is to say, a 15- or 30-year fixed mortgage with payments you can afford to make. If you don’t have that kind of mortgage, I’m going to tell you how you can get one. But for the moment, let’s assume you either have that kind of mortgage or are shopping for a mortgage and can choose. How do you make the right choice so you can pay it off as quickly as possible?

Step 1: If You’re Loan Shopping, Choose a 15-Year Mortgage.

If you can manage the higher monthly payments, signing up for a 15-year fixed mortgage is the way to go. Not only will you be free of your mortgage debt sooner, but you will also save A LOT of money in the process.

Let’s say you have a $300,000 mortgage with a 6% interest rate. Paying it off in 30 years will cost you $647,515, and $347,515 will be interest.

But if you have a 15-year fixed mortgage for the same amount, you would only pay $155,683 in interest — a savings of roughly $192,000! Of course, your payments would be $733 higher with the shorter term ($2,532 a month vs. $1,799), but that will pay off for you big-time in the long run.

Step 2: Pay Off Your 30-year Mortgage Early.

I know that, especially these days, most people simply can’t afford to make the higher monthly payments that go along with having a 15-year fixed mortgage. But that doesn’t mean there’s nothing you can do to speed up the day when you will own your home debt free.

The problem with a 30-year mortgage is that it’s designed to make you spend 30 years paying it off. If we stick with our $300,000, 30-year fixed mortgage example, that means you’re paying the bank nearly $348,000 in interest! But what if you were to take that same mortgage and make the payments on a biweekly-instead of a monthly schedule? This simple change can cut the total payment time by six years and save you $72,000 in interest payments.

It’s not a trick. Here’s how it works. All you do is take your 30-year mortgage and instead of making the monthly payment the way you normally do, split it down the middle and pay half every two weeks. In the beginning, paying every two weeks probably won’t feel any different from paying once a month. But as you should know, it’s not really the same thing.

A month, after all, is a little longer than four weeks. Therefore, over the course of a year you gradually get further and further ahead in your payments, until by the end of the year you have paid the equivalent of not 12 but 13 monthly payments. Best of all, because it is so gradual, you will hardly feel the pinch.

The impact of that extra month’s payment is awesome. Depending on your interest rate, you will end up paying off a 30-year mortgage somewhere between five and seven years early, and a 15-year mortgage three years early. You will be debt free years ahead of schedule, saving you tens of thousands of dollars in interest payments over the life of your loan.

If you’d like to figure out how much you could save on your own mortgage, visit finishrich.com. First, click on the Free Stuff tab then select See All Calculators under the calculator section, then click the Get a biweekly mortgage payment plan” calculator under the mortgage section. You can then plug in your own numbers and quickly see how much you could save by switching to a biweekly payment plan.

Step 3: Set Up An Automatic Biweekly Payment Plan with your Lender.

These days most mortgage lenders offer programs designed to totally automate the process I’ve just described. To enroll, all you need to do is phone your lender or go to its website. Many banks also offer this service for free to customers who do all their banking with them. Those that don’t usually refer you to an outside company that runs the program for them. These companies generally charge a set-up fee of between $200 and $400. In addition, there’s a transfer charge of $2.50 to $6.95 that’s assessed every time your money is moved from your checking account to your mortgage account.

A lot of companies now provide these services. To be sure you’re dealing with a reputable firm, you should probably use one that is referred to you by your bank.

Step 4: Do the Same Thing Yourself for Free.

Why spend hundreds of dollars when you could just as easily use your bank’s online automatic bill-paying service to schedule biweekly mortgage payments for yourself? Unfortunately, it’s not that simple. The problem is that if you split your monthly mortgage payment in half and send it in to your mortgage lender every two weeks yourself, the lender will simply send it back to you because they won’t know what to do with it. Or worse, they’ll stick the money in an escrow account and just let it sit there.

What you can do is add 10% to your regular mortgage check each month and have the money applied toward the principal. The effect will be the same. That’s my suggestion. Add an extra 10% per month — and make the payment automatic. Make a point of asking your bank to make sure that this extra payment is credited toward your principal — and then check your monthly statements to make sure they did it correctly.

Step 5: Get the Right Kind of Mortgage.

My early pay-off plan won’t work unless you have the right kind of mortgage — a 15- or 30-year fixed mortgage with payments you can afford. So, if you plan to be in your home more than five years and you have anything but a 15- or 30-year fixed mortgage — say, one of those adjustable-rate deals that have gotten so many people in trouble — then you should refinance NOW. Rates are at historic lows as I write this — but this won’t last forever.

First, go to a website like lendingtree.com, quickenloans.com or bankrate.com and see what mortgage lenders are offering. Then call your current lender and ask if they can match the best deal you found online.

Lending standards are much tighter than they used to be, but if you can meet the requirements, most banks will be happy to refinance your mortgage. The three basic criteria are:

  • Your debt-to-income ratio, or DTI. Mortgage lenders want your DTI to be less than 38%. That is, your monthly mortgage payments shouldn’t total more than 38% of your monthly income.
  • Your loan-to-value ratio or LTV. Most lenders want it to be less than 80% — meaning the total amount you owe on your house should be no more than 80% of what the house is worth. (For example, if your house is worth $200,000, they will not refinance a mortgage of more than $160,000.)
  • Your credit score. You’ll generally need a FICO score of at least 620 to even be considered for a loan and at least 740 to get the best interest rates.

Refinancing only makes sense if the savings you enjoy from lower interest payments more than cover the cost of closing the new mortgage. If you’re going to be in your home for more than another three years, you’ll generally come out ahead as long as your new interest rate is at least one full percentage point lower than what you are currently paying. Have your bank run a “break-even analysis” for you, they can tell you,

Yup, the cost of refinancing will be paid off in 28 months [or whatever]. You need to know this before you pull the trigger.

It’s time to go back to the basics of homeownership: buy less house than you can afford and pay off your home as fast as possible. A debt-free home is really a nice home to live in and it’s absolutely worth striving for! For more tips on paying off your mortgage faster, visit me online at finishrich.com.

Be a part of my upcoming podcasts with AOL’s Personal Finance site, Walletpop.com

As I gear up to launch my new book, Start Over, Finish Rich I’m thrilled to be doing several podcasts with AOL’s Personal Finance site Walletpop.com. (I love that site…) and I’m looking for readers who would be willing to share their personal stories with me on the air.

If you live in the NYC area, we’d love to have you join us in studio or if you don’t live close by, you could phone in.  (More details to follow…)

Here’s what I’m looking for specifically:

1. Who would like to chat with me about where you stand financially right now? As you start receiving your year end statements, what are you experiencing? Did you stop contributing to your retirement/401k? Do you know what you’re invested in? Do you have questions on how to evaluate where you are right now in order to make 2010 your opportunity to start over?

2. I’m also looking to talk to those of you who are experiencing success. Have you already started to turn things around financially? What have you done right? What successes have you had?

To submit your story, email me at success@finishrich.com. Provide your story IN DETAIL and tell me a little about yourself, including where you’re located.

Looking forward to hearing from YOU!