Money Management 101: Building Automated Systems in Your Financial Life

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For the first time ever, we’re updating an episode we did back in 2022, all about money management systems. I’m detailing the two-track approach I recommend to hit your financial goals with minimal stress, because by taking advantage of the two big As—Automation and Amortization—you can put your financial life on the third A (Autopilot). (Sorry, I’ll stop.)

(I am not a licensed financial professional, I’m just a podcaster with internet access, so please do your own due dil.)

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is President of Morning Brew content and additional fact checking comes from Scott Wilson.

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Mentioned in the Episode

• The Money with Katie Show original episode in 2022

• The Money with Katie Show episode with Brat Barrett on your top 3 “money numbers”

• Past content: The 401(k) and IRAs (check out the Blog for more)

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Katie:

So I’ve never done this on the show before, as I’ve never really been one to go for reruns, partially because my opinions evolve so quickly that even throwing it back to something I said eight months ago, I’m like, I don’t know, things have changed. Case in point, the original draft of the episode that you’re about to hear, unironically quoted Atomic Habits. But since I’ve been yapping about money online since 2020, can’t believe we’re coming up on five years, there is material that I covered years ago that is still just as relevant and just as valuable today. So I decided to revisit some older material now that I am a few years older, a few years blessedly wiser, but just as committed to healthy financial practices.

I am Katie Gatti Tassin and this is still The Money with Katie Show. Today we are talking about how to set up strong money management systems to run in the background of your financial life.

Now the quote from James Clear, the quote in question was, “You do not rise to the levels of your goals. You fall to the levels of your systems.” And it’s really a nice way of saying that most people get better financial results when they remove the fallibility of their own memory and the unpredictability of their own willpower from the equation, from their money.

So what we’re going to do is we’re going to get really specific about the structures that you can implement in your financial life to make sure you are going to be hitting the short-term and long-term savings goals with as little friction as possible. Because the end goal is to always have enough money at any given time for whatever it is you want to do. So for money to never be the reason that you have to turn something down when you really want to say yes, whether that’s something is a last minute vacation time off, or the premium cleaning service.

The idea is that we can set up systems in our finances that are going to allow us to ensure we are not leaving it to chance or stretching ourselves too thin last minute, because we just failed to plan ahead. One thing that is unchanged from two years ago when I originally put out some material about this topic: I am still going to use Betterman’s versions of these various accounts because it is the brokerage firm that I’m most familiar with. It’s the one that I think most clearly delineates between various goals that are on different timelines. But I’ll try to describe the account features clearly enough so that you can go create something similar regardless of which platform you use. And obviously if you’ve been here for a while, you know this, but Betterment is a longtime sponsor of Money with Katie. Okay, let’s get into it.

The magic happens when these financial systems allow us to amortize the effort of reaching our goals. So in my concept, in my approach here, there are basically two major tracks that are going to be running simultaneously: one is in this state of constant funding and use, and the other is more of a steady drip of contributions that are growing for the long-term.

So a couple of weeks ago I invited Brad Barrett, my friend of Choose FI fame, to the show to talk about the three major numbers you should know. And I mentioned to him that while all saving is deferred spending, you’re just talking about spending on different timelines. But that’s kind of what I mean here, the constantly flowing side of the track, these are the funds that are going to be entering and exiting your short-term savings. These are savings that are kept liquid. They’re easily accessible to you, whereas the steady drip of contributions, that’s your long-term savings that is stowed away in a place that is hopefully tax efficient and protected.

Now both of these tracks, both of these sources will eventually be spent, but I think we run into trouble financially when attributes that typically characterize one start to infiltrate the other. So by that, I mean we don’t want money that is for the long-term in a place that is easily accessible and liquid. We also don’t want our short-term savings in a vehicle that we cannot easily tap for some reason.

Now a quick little aside, you might be thinking about this if you’re at this phase of life. The prototypical example that usually comes up at this juncture because it does not fit neatly into either bucket is what about a down payment for a house? But I kind of feel like that example is so singular in its medium term hugeness that I want to set it aside until the end of the episode and talk about it.

It’s a completely separate thing, but for now to make matters more fun, I’m going to use a house analogy—yes, please hold your applause—to illustrate how these systems interact with one another best. So first up, we’re going to start in the basement right after a quick break.

Alright, the basement is where all the plumbing of your financial life lives. Can you tell I have never worked in construction? I don’t actually know where the plumbing is. It’s probably everywhere. But in this analogy and in this house, it is in the basement. The very bottom of this structure is what supports the floors above it.

So I don’t want to spend too much time here, but I would be remiss not to mention a couple considerations. The first is your auto paid credit cards and other major bills. So if you’re like me and you do all of your spending on credit cards, I recommend turning on pay to pay the full statement balance every month. There is just no reason to leave yourself open to the chance that you’ll forget or honestly, the temptation not to pay the full balance. Setting it to pay in full on its own means that you’re not going to be exposed to either of those risks. I am chronically forgetful. It’s actually really bad when it comes to paying bills that are not on autopay. Ask my landlord, the Venmos are always late. So my preference is just to never have to think about them.

This is the first level, the most basic, “set it and forget it” automation that we are instituting, and I think it is one that can kind of be a hump to get over, but I would say just try it. I think it’s a positive step.

The second is any high interest debt that you might be carrying. Now typically this is debt with an interest rate above approximately 6% that would be growing faster or competitively with the money in the market. But as anyone who has recently taken out a mortgage nose, sometimes it is not realistic to pay off all of your debt before you begin shipping away at other priorities. So depending on the amount and the interest rate, I think the only hard line in the sand that I want to draw here is to focus relentlessly on eliminating all credit card debt before you attempt to leave the basement. That sounds really dark. Stay in the basement until the credit card debt is paid off. Right?

Okay, and then finally the emergency fund. So if you already have the emergency fund, you’ve got it, set it aside, check it off the list, forget about it, stop adding money to it. I know it’s tempting, but you got to stop.

But if you’re in the process of building it up or building a backup because you had to use it, this becomes your first automatic savings transfer. So for as much as you can manage, you’re going to set the money to automatically transfer from your checking account to that emergency fund savings account of choice for the day after you get paid. I know that, in Betterment’s platform when you’re setting up an automatic transfer, you can choose from a pretty wide range of cadences. You can go, oh, I want it every other Friday, or I want it on the 5th and the 20th. You can select exactly when you want the money to be transferred into the account, but this is the first automated savings transfer that we want to be making if you are still working on that emergency fund.

And I would say one additional note on the specifics of your emergency fund, you have likely already been badgered enough about this one, but just in case you haven’t your emergency fund or if you want to call it your cash cushion or your oh shit fund, it’s a little bit like a fake zero. So in other words, it’s like the minimum amount that you want to have sitting aside in savings for true emergencies that are actually unpredictable.

Just for the sake of argument, remember it’s like two to three months of baseline expenses is probably going to be the sweet spot for most people. For my husband and I, we like to have roughly $15,000 as our fake zero. It’s actually just in our checking account. It’s not in a separate savings account, but anytime the balance drops below $15k, that is a sign to me that something has gone awry. It’s the same thing as saying like, alright, that’s our zero. That is the minimum amount we’re comfortable with having for just kind of sitting there in case we need it. Now that’s roughly two months of necessary expenses for us, and here’s generally how I keep tabs on it, given the fact that money is constantly going in and out first, I look at all of our outstanding credit card bills and any upcoming bills due like our rent.

So this is pretty easy in Copilot where all of this gets aggregated, but in the credit card section I’ll be able to see, okay, we’ve got $8,000 across all the credit cards that’s going to get paid off at some point in the next four weeks. They’re all on different timelines, but $8,000 has already been committed to those cards. And then I’ll go, alright, and then we have rent coming up in a week or two weeks. Add those two numbers together and then I look at the checking account and I say, okay, do I have that much to pay all the credit cards off and to pay the rent and an additional $15k? As long as the answer is yes, I will just eyeball the difference and know that that difference, that excess is fair game for other savings goals. And if the answer is no and it’s like, oh, well we could pay off all the credit cards and we could pay rent, but we’re going to be way under $15k.

Once we do, then I’m not touching that money. The priority is now to fill back up to that $15,000 of excess with the next influx of income. This is how we do it because our income is irregular. It’s not the same every month. So I’m not as committed to automated transfer since the number is going up and down. But people do this differently. Some people prefer to have this money earmarked for their emergency fund to be separate. They want to have that metaphoric $15,000 in a completely different account, probably a high yield savings account, the technically optimal way to do it. But for me, this is what works. And then I like to think of this account as though it is just kind of sitting off to the side of the rest of the plumbing. Maybe we will call it the water heater, if you will. It’s just like the money of last resort.

So you can literally imagine storing it in the basement and ignoring it before we move up to the ground floor of our other short-term savings. Our short-term first floor is our liquid and always accessible high yield savings account money. So your short-term savings are going to work best when they check two boxes. Number one, liquid and accessible. So not invested in the market. You want to keep this money in a cash equivalent. So like a savings account, right? I’m not talking physical cash under your mattress, but when I say cash, I mean not invested in securities, because you don’t want to risk the market doing something crazy in the short term and then you having to pull out, take a loss and obviously that’s going to disrupt your progress. And number two, earning a decent yield if at all possible.

So I recommend keeping things as simple as possible. For me, that means a high yield savings account that’s going to function like my own personal slush fund at Betterment is called the cash reserve account. I think it’s currently paying 4.5% interest. And this is really your, I don’t know, think about yourself like your own sugar daddy. This is like the overflow source of money. If you need to make an unusual one-time purchase that might not typically be covered by your normal cashflow. So this could be your dog needs a surgery, you got to do some maintenance on the car. You are buying a plane ticket to your friend’s wedding, there’s an expensive dress that you want to buy, things like that that might not fit into a normal budget, but it’s kind of a splurge account.

Now here’s the thing. The amount that you contribute to this account every month from your regular incoming cashflow, the amount that you save it is going to depend fully on A, how often you make purchases of that kind, and B, how much money you earn.

Now, earlier in my career in 2018, I had to plan ahead to buy pretty much everything. I had to plan ahead if I wanted to buy a $500 plane ticket because I did not have an extra $500 a month at the end of every month that I could just blow on a plane ticket. Now a $500 plane ticket actually fits within my allotted travel budget, whereas a $10,000 vacation, that doesn’t. So that would be something that I would be setting aside cash for every month in high yield savings knowing that it will be there for me when it’s eventually time to use it for said vacation.

So to figure out what is appropriate for you, I would probably just take a look at the last six months of your spending and gauge what proportion of your expenses are fitting into this abnormal category. Now if you use a wealth planner, you can track this type of spending in the irregular expenses box and it gets kind of broken out from the rest of your regular budget.

But once you have a general sense for what’s typical for you, you can experiment. So add up everything from that annual car insurance bill to the replacement laptop that you’re trying to buy, everything in between and just divide by 12. That is going to become the amount that you’re going to set to automatically move from checking to this high yield savings, slush fund, splurge fund, short-term savings, it whatever you want, and it’s just going to provide a second source of income for you when it is time to splurge. And then when you need to tap it, you just make a withdrawal, you spend the money, and then the next time that you get paid that process of refueling and replenishing that account begins. And because we’re talking about an account that is functionally just a revolving door for your money, true market-based compounding would not have had a chance to kick in.

So you should feel totally comfortable about just keeping this money in savings and not investing it. The only thing that I would note as a little bit of a watch out is that some traditional legacy banks are a little annoying about having certain rules around their savings accounts. So like, oh, you always have to have a minimum balance of $500 or you can only transfer money out twice a month or whatever, and they’ll charge you fees if you do not meet those requirements. So I would just say as you’re picking where you do this, if you do not have an account like this yet, keep that in mind as you choose where you want to set it up and that you’re picking something that’s going to fit the way you intend to use it.

Okay, so our short-term savings, our automated savings to this splurge account, fund money account, what have you, that’s our ground floor. It is now time to go upstairs to the second floor and make sure that our long-term goals are on track. And we’re going to do that right after a quick break.

Alright, now we’re on the second floor. We’re talking long-term baby. We are investing for your tax advantaged accounts. I would say that retirement and long-term are mostly synonymous. It basically just means that below the surface of the money that is coming in and out on an annual basis, you are building a deep moat of wealth that you can draw on at some point in the future to quit your job, buy a boat, send a kid to college, I don’t know, live your truth.

The goal though is that by starting early and shoveling money into these investing accounts, by the time you actually need that money, you have more than you know what to do with. So the balance between our ground floor, short-term savings and our second floor long-term savings, and then obviously your regular monthly spending, that is the core challenge. That’s honestly the core challenge of all of personal finance.

And the obvious truth that is worth stating explicitly is that the more you can earn, the easier that balance will become. But when we talk about these long-term savings goals, we do have time on our side. So the short-term goals are not going to benefit much from the power of the stock market really. They’re not going to benefit at all from the power of the stock market, not in the stock market. You’re going to get some yield, but again, it’s money that’s going in and out. So the revolving door effect means compounding is not really happening in this account. You’re really just being proactive. But your long-term investments, they might actually like 10x in size over the decades to come. Time is the most potent contributor to your long-term savings goals, which is why starting early is so helpful because you are giving that most potent ingredient all the power that it needs to go to work for you.

So we use 401(k)s and IRAs and these other types of long-term savings accounts because they shelter those compounding returns from the degradation of taxes that would also compound over time if not protected against. Now I have done probably too many episodes and blog posts at this point about 401(k)s and IRAs. We can link some of the popular ones in the show notes. I don’t want to spend a ton of time on the details of the accounts today, but if you are also able to open a taxable brokerage account as well with a similarly long timeline, I’m talking 30 years, 40 years, that is going to really supercharge things.

So now you might be going, alright Katie, I thoroughly overwhelmed by the amount of stuff you just threw at me. So I think let’s do a little summary. Let’s do an example to get the people going.

Alright, so as you set up your financial systems with your short-term and your long-term savings goals, you’re starting to think about the amount of money that is appropriate to be funneling to both based on how much you earn and what your goals are. You might end up with something like the following, depending on your income situation and how granular you want to get.

So let’s say you make $3,000 per pay period. Alright? So technically the first thing that happens will be your contributions to retirement because that’s happening before you even get paid. So let’s say that’s about 500 bucks, that money immediately hits the 401(k) and then next the remaining funds, the $2,500 is going to hit your checking account where all of your new money comes in. Yay, new money day. Next up, you might be automatically sending some of that $2,500 to a high yield savings account. Maybe you are replenishing some of your emergency funds that you had to use last month for something that came up on unforeseen, you blew a tire. So alright, $250 bucks goes back into that emergency fund to top it off again.

And then maybe there’s another high yield savings account in the mix where you’re making those short-term savings contributions for your own personal slush fund. Let’s say you also have $250 going there. These are both automatic transfers, automatic contributions that are happening the day you get paid or the day after you get paid. So the second that money is hitting, it is going off to do its job. Now you’ve got $2,000 left.

Finally, you are probably going to be making any additional long-term investment contributions. We know the 401(k) already happened or whatever the employer paycheck contribution is has already happened, but now we’re looking at the Roth IRA, which is available to any American with earned income and or we’re talking long-term taxable brokerage account. And depending on your spending, depending on the budget, how you are shuffling these funds around, you might be putting a couple hundred more dollars into those spots as well. And again, we’re talking automated transfers. So maybe the savings account transfers are happening same day or next day, and then any long-term contributions are coming out the day or two after that.

But the idea is that you want to have this punctuated cadence in the month of money comes in and then immediately it is being funneled away to do its job. So it’s not just sitting and checking, rotting away, waiting to be spent where you’re either going to forget about it or you’re going to forget that you had the goal and you’re going to spend it. So when it comes to divvying up your funds every month into these various places, that is again going to depend on how much you’re earning and the timelines associated with your goals.

In general, my philosophy both in action and theory has been to attempt to make some contribution to all of them even if I cannot contribute the maximum allowed amount to any of them. I think the hardest part here is that the initial transition from spending everything as it’s coming in, just kind of looking at the amount and the checking account and then using that as a gauge for what you can or can’t buy. Shifting from that to implementing a very regimented, proactive plan for your money. That’s really hard and that’s because most of us do a lot of our spending again on credit cards that are sometimes not due until 45 days later. So you might decide today to put the brakes on and say, yeah, I’m going to get it together. I’m going to institute this plan, it’s going to be great. But then the bill that you get next week or two weeks from now is going to be reflective of behavior that you had two months ago.

That’s okay, right? The transition period can feel wonky. It takes a cycle or two for your new behavior to get integrated and reflected in the credit card statements and in the investment accounts. This will be especially true if you are still shipping away at past spending in the form of other debts. But I will say that challenge aside, opening the accounts, labeling them appropriately and determining how much you want to automatically transfer into each one every month or twice a month, whatever your payday routine is, that is step one and starting smaller. So you can assure you’ve got enough money left over to pay those last few big credit card bills or wheels off payments, no problem. That’s totally fine. You just want to make sure you are increasing the transfers as you phase out of your current cycle.

So in my life, my first automatic transfers, they were less than a hundred dollars each. I think they were like 50 bucks a pop. But the important thing was that the structure was getting put in place, the system was getting put in place so that by the time I kind of got my spending under control and then started really gunning it on the income side, it was really easy. I could just go into the platforms and start clicking the up arrow on the contributions and we were really off to the races.

Okay, time to go to the attic or the shed. I don’t know, I’ve really lost control of this metaphor at this point, but we’re talking really, really big medium term goals like houses.

So as promised, we’re going to return to this singular giant example of the down payment and we’re going to talk about this one a little bit differently. So feel free to mentally insert any other really big expenses that might take years to save for and are not going to be funded from $200 bucks a month in automatic transfers in a couple of weeks. I think it’s important to say this upfront, I don’t want to sugarcoat it: If you have $0 to your name and you’re like, I’m going to buy a $2 million house next year with a theater room in the basement, that is going to be really hard to do unless you are raking in an absolute shit ton of money or you have an extremely rich and extremely generous relative or three houses, weddings, these other things that tend to cost tens of thousands if not hundreds of thousands of dollars.

They do require something that is in between our short-term and long-term strategic planning. We got to have the accessibility and the safety of our short-term funds, but the aggression and the size of our long-term investments. And that is technically impossible to do at the same time. So we have to compromise, we have to find a balance. And here I think your timeline is going to help us determine the most appropriate area and way to save. So if we’re talking about goals that are going to require, I would say more than two years’ worth of savings, if you are penciling this out and you’re like, yeah, there’s no way I’m going to be able to accumulate what I need in just a couple years, I would lean toward a taxable brokerage account for this, like the major purchase brokerage account that Betterment offers. It is technically just a taxable brokerage account, but you can bucket name it and invest it according to medium term goal intentions, and you’ll basically just answer a few questions about that desired timeline and it’s going to invest the money for you in a way that considers that risk tolerance and that timeline in its allocation.

But if we are talking years and years of saving to get there, that is probably, if you are comfortable with it, a more appropriate level of risk than just kind of tossing it into a savings account. So in other words, if you open a regular general investing account with betterment and you say, Hey, I’m using this money to retire in 30 years or 40 years, the algorithm is probably going to put you in something like 90/10 stocks, bonds, if I had to guess. But if you say, hey, I need this money in this major purchase account in six or seven years, okay, now we’re probably going to be talking like a 50/50 split or a 60/40 split, something that’s more conservative, but something that’s still going to grow more than cash alone, theoretically, hopefully without exposing you to any undue amount of risk for the window of time that you’re looking at. And I have to imagine other robo-advisors are going to work the exact same way.

One other consideration, depending on your comfort level with investing this money, and I would say the level of commitment that you have to the timeline, if it is five years or bust and you absolutely need the money in five years, and if you don’t, you’re going to die then, alright, probably you don’t want to put it in the market because the market is in some ways more of a gamble. You are taking on a risk by participating in the market. So you could consider sticking with the high yield savings account for those funds, which are going to bear a known yield hopefully around 5%. As of this recording at 2024, the S&P 500 is up about 20% for the year. So I would just say if you knew that ahead of time, you’d probably go all in on large cap growth, but we don’t know the future.

So this is in many ways just an educated bet where we are taking our risk tolerance into consideration. Whether you decide to go with the major purchase style brokerage account that is going to be a little bit higher risk, higher reward, or a high yield savings account like cash reserve. What is most important is how much you are contributing. And that’s the hardest part. The hardest part is putting the dang money in.

So the same way that we plan for those travel expenses, we can plan for something like this if we know we need $50k in five years, that is $833 a month that needs to be dumped into this account. The intent is that the growth in the account, the hope is that whether we’re getting market gains, price movement or we are getting a fixed yield, that that’s going to help that $50,000 remain competitive over the five years that we are saving.

So much like we have automated everything else up until this point, if you are getting paid twice a month, you’re splitting that monthly goal in half. You are scheduling the automatic transfers for a day or two after payday. So the money is being whisked away from the checking account into this goal account. Okay, so in conclusion and some closing thoughts. The big picture idea for this episode is really simple. It’s that each time you receive a paycheck, some portion of that paycheck needs to be automatically transferred into these various accounts that are dedicated to future. You are budgeting for the amount that you’re going to save for those things. You are building up the reserves to deploy when you are ready, and it is up to you to determine what is an appropriate and reasonable goal based on your income and the plans that you have.

So to give you some parting encouragement, I wanted to go back and look at the gains that I had made in one of the first accounts that I began investing in 2017-2018 timeframe because I started contributing to it little by little and the contributions in the beginning were very small. But like I said, once I got the spending under control, once I started working more honestly, getting more jobs side hustling, finding other sources of income, negotiating for raises, just shipping away at getting more money coming into the system, I started investing more and more and more. And so I think I contributed to this account from about 2018 until 2021, which is the point at which I started investing more heavily elsewhere. So there were, I don’t know, solid three to four years there where I was focused on this one and that account apparently received, when I look back at my cost basis, a total of $109,000 of contributions over those months, and I haven’t touched it since. I just left it alone and shifted my focus elsewhere. Today it has around $150,000 in it, which means that in just three more years’ time of sitting there and doing nothing, it has grown in value. By around a third, it has gained like 33% in value. Now that is obviously a testament to the time period that we’re talking about and what the market was doing during that time period, I think. But it’s also a testament to the fact that contributions were systematically made consistently over time for years. So I don’t want to imply that that rate of return is going to be normal or that we’re always going to get that in the future. Just that when we talk about amortizing effort, those are the gains that we stand to make you put in the effort. Little by little for a couple of years, mostly contributing. I was contributing pretty much everything I was earning from side hustles and then I ignored it. I put no work in for years, and now it has put in around $40,000 of work on its own, and that is only going to continue to compound. And making your first automated contribution is the first brick of that building process or the first pipe. I don’t know. I have lost control of the housing analogy. So it’s a good thing that the episode is over.

That is all for this week on the first ever yassified rerun of the Money with Katie Show. I’ll see you next week for what’s going to feel like a really wild shot chaser. It’s a deep dive into capitalism with the author of Vulture Capitalism, Grace Blakeley. Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin with our audio engineering and sound design from Nick Torres. Devin Emery is our chief content officer, and additional fact checking comes from Scott Wilson.