I read David Bach’s The Automatic Millionaire over a year ago and have been meaning to implement the ideas found there, but haven’t gotten it all done until now. But I finally did it! I got my financial house into even more order. Here are some details of my particular setup:

  • Every paycheck, 17% goes into a 401K, 80% invested in stock funds, 20% in bond funds.
  • The net goes to a checking account. From there:
    • 5% goes to an ING Orange savings account. This is my emergency fund. I have enough here for one year’s expenses.
    • 5% goes to another ING Orange savings account. This is my vacation/goodies fund.
    • 40% goes to a Firstrade brokerage account to be invested in index funds as follows:
      • 20% to an international index fund (VGTSX)
      • 20% to a small cap index fund (NAESX)
      • 25% to a mid cap index fund (VMGIX)
      • 20% to a large cap index fund (VIVAX)
      • 10% to a bond index fund (VBMFX)
      • 5% to a REIT index fund (VGSIX)

      I use Firstrade because they have $0 commission on mutual funds. I hope they can stick around for a while and not get acquired! (I previously transferred a Roth IRA to BrownCo to get away from E-Trade’s high fees, only to have E-Trade acquire BrownCo a few months later! Goodbye, $60 account transfer fee!)

    • 50% stays here for monthly expenses and the mortgage (mortgage is automatically deducted from checking account every month). I would have monthly bills automatically deducted as well, but I don’t trust the phone or credit card companies, plus I want to review all charges before paying. I do have a “bill paying system” though (I pin them to a prominently placed corkboard in my office as soon as they come in), so I rarely miss any bill payments (only missed 1 ever; forgot to pin it to the corkboard!).

All this is automated with direct deposit and scheduled ACH transfers. Paycheck is direct deposited to my checking account. Since my paychecks come bi-weekly, I set up bi-weekly 5% withdrawals to both ING accounts with ING’s Automatic Savings Plan. And Firstrade allows you to set up periodic investments into mutuals funds, withdrawing money from a bank account. I could direct deposit directly to ING and pick up a few days more of interest every month, but should I need to, I find it’s much easier to change things in ING than to change my direct deposit amounts through my employer.

What about an IRA?

I usually don’t know if I qualify for a Roth IRA or not until I do my taxes each year, so for my IRA, I wait until my CPA tells me what kind of IRA I qualify for, and I write a check for it. My IRA’s are also invested in index funds (and always have been). I treat doing this as part of my tax return, so every year around April, I max out my IRA for the previous year using money from my vacation fund and/or emergency fund. I know, this is not strictly an emergency, but I always replenish the emergency fund when necessary. Besides, I don’t want to open yet another account.

Now I don’t have to worry too much about investments anymore, other than an annual reallocation. Before doing this, my 401k mutal fund returns and IRA index funds returns never fail to top my own stock picking returns, so going index funds all the way is probably for the best as far as I’m concerned. (Well, not reallyALL the way… I still have a separate brokerage account where I can play around with stocks if I want to, but there’s not much in there and I’m not adding any more. I don’t want to lose any more money!)

For some context into my choices, I’m in my early 30’s with no debt except for my mortgage. If there’s something I could be doing better, please let me know! This financial structure should ensure that I will someday be free from 9 to 5, if not as soon as I would like.