“Notice your breathing.” It is a catch phrase of meditation, relaxation, and sleep podcasts. Unfortunately, our brain has two settings for handling our breath: manual or automatic.
Automatic breath imperceptibly keeps you alive second by second. It breathes when you are awake. It breathes when you are asleep. It breathes when you are distracted. It breathes even when you are anesthetized. Automatic breathing is rhythmic, easy, and painless.
Manual breathing on the other hand is patchy, laborious, and uncomfortable. Once you take the reins and try to control your breath, it is hard to produce the same results. It requires focus. Breathing too fast makes you lightheaded. Too slowly makes you feel short of breath. Too strong and you can fatigue your muscles. Too light and you may not fully oxygenate your body.
In financial habits, you also have the option between manual and automatic.
Manual vs. Automatic Saving
Manual saving requires us to defer spending our money consciously, and manual investing requires us to place new trades intentionally. Saving too much can unnecessarily impoverish your life. Saving too little impoverishes your future. Investing too infrequently and you miss out on investment returns. Too frequently and you are wasting your life on your finances rather than your financial goals. The manual options are patchy, laborious, and uncomfortable. They require focus. What is more, they don’t produce the same results as the automatic option.
Automatic saving and investing is rhythmic, easy, and painless. This is why you should set your finances to save and invest by default.
Directly deposit your paycheck from your employer into your savings account and then only transfer to checking what you are going to spend. This step separates your standard of living from the size of your income. As your income increases from future bonuses and pay raises, your checking account distribution stays the same size while your savings automatically keeps the remainder.
Then, automate the investing of your savings as much as you can. The easiest way to do this is to hire a fee-only fiduciary investment manager who has a Cash Flow Management service. We offer this service as a basic service included even at our cheapest “Do-It-Yourself” service level in hand-traded accounts.
Through these services, your investment manager strives to keep your accounts as fully invested as possible. After communicating your withdrawal needs to us, we make trades to ensure there is sufficient cash to meet those withdrawals. If you have surplus funds from deposits or dividends, we make trades to ensure the extra cash is invested according to your asset allocation.
This cash flow management service means that your monthly required minimum distribution (RMD), the direct deposit of your automated savings, your quarterly estimated tax payments, and other expected cash flows can rely on our trading to ensure that the right balances are either ready for withdrawal or invested in the markets.
By default, we strive to keep 6-months of planned or regular withdrawals in cash. Anytime you need to withdraw funds beyond those planned withdrawals, a simple email to our team means that we can both generate more cash and make sure our trading does not interfere with your transfers.
This service truly automates your investing so that you don’t have to think about it.
The second easiest way to automate your savings is to use your broker’s “dollar cost averaging” investing feature. This feature was invented to reduce risk, but it also effectively allows you to automate subsequent periodic purchases of a particular fund. Through the program, you can set-up automatic subsequent period purchases of your desired mutual funds that are the size of your automatic savings.
If you get a large bonus or if your income is variable from month-to-month, then you will still need to manually invest some of your savings. However, you can automate as much as possible so that you don’t miss out and have cash waiting on the sidelines.
The power of compound interest means that saving and investing a little bit when you are young is worth more than a diligent savings a decade later.
If you are nervous to get started investing because you are afraid of market crashes, take some time to research the markets. The stock market can be confusing for people who don’t understand how it works. Some say the stock market is “legal gambling” or that it “is all made up.” The news writes about how “the stock price turned on the news of…” or “investor sentiment caused the price to… .” These sorts of news reporting can make the stock market feel capricious. Setting the price based on emotional feelings or news headlines is silly.
However, the market is not made up; it is made. For every stock listed on the New York Stock Exchange there is at least one company (and often several) who act as a market maker. A market maker is a firm that stands ready to buy or sell a particular stock on a regular and continuous basis at a publicly quoted price. My great-grandfather was a market maker for the American Can Company.
Market makers have to buy stock as long as people want to sell it. They also have to be able to sell stock as long as investors want to buy it. They are allowed to move the price after a sale to provide negative feedback and allow them to make the market no matter how many buyers and sellers there are.
This is why the stock market is inherently volatile but also inherently profitable. Stock prices are not random nor should their movements be sensational. Investing is owning a business’s profits. If the profit has stayed the same and the price has gone down, consider the stock price discounted and see if you can buy more.
The best advice for new investors is to simply not peek. Invest your money and then don’t watch it. The analogy I always use for the stock market is that the returns of the markets are like a whip being cracked up and down by someone riding an escalator. You’ll get dizzy tracking the tip of the whip, but if you take a long-term perspective and watch the escalator, you’ll be able to relax and enjoy the ride.
Automatic vs. Manual Spending
In the same way that many people choose the wrong setting for their saving, trying to handle the process manually rather than automating it, many people choose the wrong setting for their spending.
Automatic spending is rhythmic, easy, and painless. The only problem is that it is unhealthy for your finances, doesn’t provide as much benefit as it costs, and impoverishes your future. Spending more than is necessary is a waste.
Deadweight loss is an economic term signifying a loss that is not offset by a corresponding gain. This phrase is most typically used when talking about gift giving. The giver might buy something that costs $50 but you only receive $10 of benefit from it. In this example, the remaining $40 is deadweight loss. The giver spent it, but that potential value was lost in the exchange.
Deadweight loss also happens when you set your spending to automatic mode. It is mindless spending where your past self is the gift giver and your present self is the recipient not receiving the full value of the gift.
Examples of automatic spending are subscription services, automatic withdrawals, or automated Bill Pay such as magazines, phone plans, TV packages, Patreon support, or utility bills. Another example is habitual automatic spending such as regular eating out, coffee shop visits, or just-because shopping. Automatic spending also comes in if you immediately buy things as soon as you want them without any conscious evaluation or comparison shopping.
Before currency, the product of my labor was the only way I could acquire the product of your labor. In a barter system, I trade my chicken or the promise of my chicken for your stew. If I don’t have any goods you want, I can’t acquire the rights to your stew. However, in today’s monetary system of trade, instead of getting an inherently valuable good as a reward for my labor, I get money. This money is just a placeholder of my labor not yet rewarded.
Mindless or automatic spending is a waste of your labor. If you earn $10 per hour and mindlessly buy something that costs $50 but is only worth $10 to you, it’s like getting tricked into working 4 hours without compensation. The solution to this predicament is making your spending conscious again.
Manual spending is patchy and uncomfortable. It requires focus, but it also saves you from wasting your labor.
As a first step, login to all of your credit cards and bank accounts, go to the Alert Settings (sometimes found under Profile Settings) and give yourself an alert any time a transaction is greater than $1.
For my credit cards, this alert is phrased as “More than $__________ (USD) is charged to my card for a single transaction” where in the blank you can type “1.00” and then click it on. For Schwab Bank, you can find this under “Services >> Alert Settings.” Then, in the “Banking & Debit Cards” section, you can turn on alerts for “Withdrawals more than” and “Purchases more than” $1.
With these alerts on, you will be aware of both your automated charges and your mindless spending. It will help make spending money uncomfortable without immediately making it inconvenient.
As later steps, consider reading our How to Spend series. In that series, we offer practical advice on how to take control of your spending. For example, keep a price book so you know when you are being overcharged. Purchase in season to avoid unnecessary expense. Understand that having an item right now or without work is a convenience that comes with a surcharge.
In every financial negotiation or purchase, be willing to walk away. Learn to do without. Instead of buying new, waste nothing by taking care of your things and using only just enough. When possible avoid, delay, or defer your impulsive desires to create more savings.
There always exists someone living their dream with only half of what you have. There are always more cuts you could make in your budget. Those living off of less may be living a far richer life than you.
In areas of life that are unimportant to their goals, the rich are frugal to the point of being miserly in their spending. They might take their lunch in a brown paper bag, enjoy activities that are free, clip grocery coupons, fly the red-eye stand-by, not flush every time, buy a used car, live in a modest house, or even repair their shoes with duct tape.
However, when it comes to what is important to them, they are willing to spend money. They are willing to take financial risks. They invest their wealth in the markets, their businesses, and themselves, and they spend their money on their life goals.
What is the money for? With mindful spending, you can focus your efforts where it really counts.
Automate your savings. Take manual control of your spending. This is the path to wealth.
Photo by Jp Valery on Unsplash