You and I probably have at least one thing in common: the administrative burden of modern life is exhausting. Overwhelming. Frustrating. Just nothing good about it, but we can’t escape it.
I regularly, desperately wonder: How can I Do Less, Think Less, Figure Less Out? Because figuring things out, making decisions, takes energy. And sometimes I just don’t have any to spare.
Which leads me to this idea I heard a while ago (where, I forget):
One feature of a good decision is that it reduces the need to make decisions in the future.
It’s one of those things that just landed. It’s been sitting in the back of my brain, percolating, for a long time now.
Make Decisions Now that Eliminate Decisions Later.
There are plenty of decisions we can’t avoid. Which job to take. Which flight to buy. What to have for dinner tonight.
But there are plenty of decisions we only need to make once, and then we can coast on that one decision for a long time.
Some people make that decision in their wardrobe: “I like this v-neck long-sleeve t-shirt and these yoga pants. I will buy the shirt in 10 colors and several pairs of pants.” (And now you know how I show up to work every day.) You figure that out once, and now you don’t have to decide where to buy your clothing or what to wear each day.
Maybe it’s where you go on your summer vacation. “I always go to this town on the lake.” (Again, come July each year…this is where you’ll find me.)
I’m sure you have something in your life that you simply made a decision on long ago and it works well enough. The effort to change that decision simply isn’t worth it to you.
I think it’s really powerful, helpful, and increasingly essential that we do that with our personal finances.
We can’t avoid some financial decisions as they come up. But in my own finances and my work with clients, I’ve started thinking more and more about:
How can we create rules that will apply over and over again?
Even better, how can we automate those rules?
If we were able to do that, we wouldn’t have to make even more decisions in the future, and the ones we’ve already made will just get done without effort. I don’t know about you, but especially of late, I will take just about anything that makes life feel less effortful.
One of the enemies of such an approach to our finances is our seemingly instinctive desire to optimize.
Screw Optimization. May I Please Have Another Serving of Ease?
Imagine two headlines:
“5x the Interest You Get On Your Cash!”
“Be sure to save 15% out of each paycheck to retirement investment accounts.”
Which article gets your click?
I’m guessing the first.
It is entirely understandable that we obsess over optimizing. It is, to first order, the only advice we ever get.
Because all the social medias, all the financial media, all the company Slack channels, all the subreddits, all the YouTube channels…they need your eyeballs.
And good financial advice simply isn’t eyeball-y. It’s boring. It basically stays the same day in, day out, year in, year out. Jason Zweig, long-time columnist at the Wall Street Journal, once wrote:
My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.
Not many people are as good at writing about money as Jason Zweig, so in order to keep the eyeballs, they come up with ever-new ways of tweaking your finances.
Just as fashion magazines have to keep up a steady stream of new advice about fashion/makeup/hair in order to retain your eyeballs. (Or so I imagine. Ever since my flirtation with Seventeen magazine in highschool, I haven’t been much of a consumer of such magazines. Which probably goes a long way to explaining the Eddie Bauer long-sleeve v-neck t-shirt + yoga pants uniform I wear.)
We are understandably influenced by that.
You’ve Probably Been Tempted to Optimize in One of These Ways.
Over the years, these are the most common ways I see our clients trying to optimize:
- Moving bank accounts to a different bank for a sign-on bonus or interest rate that is twice as high (2 x 0.1%…whoo!).
- Many different investments. Maybe you’ve been tempted to own many different funds (tech sector fund! Finance sector fund! Fund that invests in companies that have women on their boards!) when one will do (total US stock market). Or you have wanted to own all the new-fangled (yes, at 46, I’m clearly an Old) investments like crypto or hedge funds (‘sup, Titan) or real estate (ex., Fundrise) or angel investing.
- Comparison shopping on smaller items. I can’t tell you how many clients who make over $300k/year, when reviewing their spending, talk about spending less on groceries. Groceries! I mean, admittedly, the same thought occurs to me, so I get it. But as Ramit Sethi would say, “Stop asking $3 questions.”
The Point of Money Is Fulfillment, Purpose, Security.
We have asked all of our clients on various occasions what the purpose of money is in their life. The answers all come back something like:
- To live the life I want
- To make me feel safe
- To give me flexibility
- To give my kids opportunities
No one, and I mean no one, said anything like:
- To grow my money as much as possible
- To give me something to obsess over on Saturday nights
Yes, we have to do some things right in our finances in order to have the life we want, in order to feel safe, in order to have flexibility, in order to give our kids opportunities. But those things are surprisingly few:
- Spend less than you earn (and save the difference)
- Invest reasonably
- Protect yourself (cash cushion, insurance, estate planning, and the like)
- Don’t make any big mistakes.
At no point do any of these things need to be optimized to work. And optimizing creates work, takes up your time (takes it away from that life you want to live), and creates stress.
It has been both amusing and gratifying to see many clients over the years, clients who had been trying to optimize in the ways I list above, eventually say “Screw it. Let’s just simplify.”
They reached a point where they realized they weren’t getting the benefits out of optimization that had driven their efforts in the first place. Meanwhile, their efforts had created more work, more stress, and more administrative overhead for them. And it was such a relief for them to just Give. It. Up.
Finance Decisions You Should Make Rules For (and then Just Follow).
Above, I listed the precious few things you have to do right in order to “win” at money. Even though there are few of them, if we’re not careful, we can still spend far too much time and effort and stress doing them well enough.
Imagine if you had to decide, every single time you got a paycheck, how much to save? That’s 12, 24, or 26 times a year that you have to make a decision about how much to save! I’m exhausted just thinking about it.
This is where rules come in handy. You make the effort once to figure out what you should do, and then you just follow those rules for a while, until your circumstances change meaningfully.
Below I provide some sample rules that you can use for inspiration. I don’t know you or your life or your goals, so obviously I can’t know what’s specifically good for you. But the rules below are at least reasonable. For inspiration and some more specific ideas, take a gander at what Ramit Sethi recommends in his I Will Teach You to Be Rich universe.
Rules about Saving
Here’s an exercise we commonly go through with clients:
High-level rule: Save 15% of your income for financial independence/long term investing.
What are the specifics of the rule?
Let’s say your salary is $300k. You therefore need to save $45,000. How?
- Always max out your 401(k). For 2022, that’s $20,500. That leaves another $24,500 to save.
- Do you have access to an after-tax 401(k)? Great! Often, that is the best place to save for financial independence, and usually you can contribute upwards of $30,000 to it! That should take care of that full $24,500.
- Do you not have access to an after-tax 401(k)? That’s cool. Let’s save:
- $6000 each year to your backdoor Roth IRA contribution
- $18,500 to a taxable investment account
Ooooh, but let’s say you also have RSU income. (I know, I know, a sore point nowadays, what with tech stock prices having fallen so much.)
Every time RSUs vest, here is a reasonable set of rules you can follow:
- Look at your paystub to see how much that RSU vest was worth. Let’s say it’s $50k.
- Sell all or at least some of your RSUs to generate cash.
- Calculate how much tax you still owe. Set aside that cash or possibly even pay estimated taxes. Let’s say you need to pay another 15% of that $50k income = $7500.
- Save another 15% = $7500.
- You can do what you want with whatever money remains.
Maybe your situation is even more complicated. With ESPPs and exercisable stock options, I wouldn’t be surprised if it were. But that doesn’t mean rules are impossible to create.
It just means there might be a few more, and you need to think about it a little more on the front end. But the result is the same! Front load the thinking and decision making, and then enjoy just clicking buttons going forward.
Rules about Spending
If you have your saving rules in place, and you’re actually using them, I personally get way less concerned about you having detailed spending rules.
Assuming you’re honoring your saving rules, then I want two things in your spending rules:
- Make sure you’re not spending more than you have.
Credit cards encourage us to “cheat” by allowing us to spend more than we have left over after we save.
- Make sure you’re spending on what brings you joy.
Yes, you have to pay utilities and property tax and for your transit pass. But make sure you’re leaving enough money for something that excites you. Travel? Cars? Bicycles (now you’re talking my language)? Clothes? A certain kind of home?
Maybe your rules look like:
- I spend $10,000/year on travel.
- I buy one yoga class every week.
- I buy whatever I want at the grocery store and farm market.
- I don’t spend more than $200/mo on clothes.
This is not an exercise in budgeting. This is an exercise in self-exploration.
The hardest part here (and it can be really hard!) is figuring out what is important to you. What brings you joy. It’s so easy to go through life not understanding this and simply spending based on values and habits you’ve absorbed from other people.
Rules about Giving
At some point in your life, I figure you’ll start thinking about taking care of someone other than just yourself, if you haven’t already.
Giving to Charity
I created my own giving plan a year or so ago. It works for me. It could inspire you.
It boils down to: I give away 10% of last year’s income. Math can’t get much simpler than that.
Giving to Family
Many of our clients have extended family (birth or chosen) whom they want to or need to support financially.
Your income might seem Very Nice for you…but if you’re actually trying to use your income to support more than one person, then it quickly can become not enough.
Rianka Dorsainvil, a financial planner who specializes in helping first-generation wealth builders, says this:
For example, with each paycheck you receive, budget for a specific amount to be automatically deposited into separate savings or checking accounts that have been earmarked for family support. Having these funds already set aside gives you the flexibility to support family members when they need it without having to dip into your personal budget or savings to do so.
So, you could create a rule that says: Put 5% of each paycheck into my “help my family” account. When that account is empty, I can’t help anymore.
Rules about Investing
With our clients, we create an Investment Policy Statement. It’s about 4 pages long (in part because government regulations require a certain amount of boilerplate), but can be boiled down to:
- What goal am I investing for?
- How much time until that goal?
- How tolerant am I of risk/volatility (i.e., my investments veering wildly up and down in value)?
On the basis of considering those three things, we set an “asset allocation” for our clients, that is, a balance of stocks and bonds for their portfolio. We also choose broad market, low-cost funds to invest in.
You could create your own IPS! And you could probably fit it on an index card. You put effort, up front, into thinking about what you’re investing for, and what you’ll be investing in, and then invest your money accordingly. And don’t change a thing until or unless your personal situation (not the market) changes.
Rules about Taxes
You might wonder what I even mean by this. It’s not as if taxes are negotiable.
What I really mean is “rules about paying taxes.”
Especially if you have meaningful RSU, bonus, or NSO-exercise income, you will likely owe more taxes than your company withholds for you. How will you pay that? When will you pay that?
You might create rules that look like this:
After every bonus, RSU vest, or NSO exercise, I will:
- Do a back-of-the-napkin calculation for bonus or RSU income, and pay estimated taxes every April 15, June 15, September 15, and January 15. or
- Do the same back-of-the-napkin calculation, and set aside that cash so I have it for next April 15. or
- Do nothing until October, at which point I’ll work with my CPA for a tax projection and pay any estimated tax liability then.
What feels right to you? I personally like keeping on top of my tax liability as it’s created, so I pay estimated taxes throughout the year.
Rules are Priority 1a.
Automation is, to quote the CEO of a start-up I used to work for, Priority 1b.
It’s not as important as rules, but it’s still really important.
Once you create your rules and automate them, you don’t have to remember or do. It just happens. Your wealth just builds, your enjoyment just happens, your administrative crap just gets dealt with…without effort.
For sure, not everything can be automated. So, look for what can be!
Let’s look at the example rules from above:
- Savings through your 401(k). Set up contributions on your 401(k) website on internal benefits portal.
- Savings to your taxable brokerage account. Set up direct deposit from your paycheck, or an automated transfer from your checking account.
- Spending on, say, vacations. Set up direct deposit for $500 per paycheck directly into a dedicated Vacation bank account.
- Giving money to your family. Set up direct deposit for $500 per paycheck directly into a dedicated Family Support bank account.
- Investing. In your 401(k) or HSA, you could choose a target-date fund.
Can’t Automate Fully? How About a Calendar Reminder?
You just can’t automate some things. Some big things.
RSUs are a great example. We have this beautiful set of rules above, created to deal with RSUs.
Except you won’t know the dollar value of your RSU vest until the moment they vest. So you can’t possibly know what 15% of your RSU vest will be. So you can’t automate moving money hither and thither.
What about putting a recurring entry in your calendar to remind you, on every RSU vest, to go in and execute the rules? Yes, you still have to do the basic math from the rules, and click the buttons. But you don’t need to remember when to do it, and you don’t need to remember what you’re doing.
I, for example, have an annual calendar reminder for calculating that 10% of last year’s income and moving that money into a donor advised fund.
Accept Good Enough.
One risk of not being able to fully automate is that you’ll have to choose to do the work each time. And when you choose to do the work, you might not execute exactly according to the rules, for a variety of reasons I don’t care about in the moment.
I’m here to say: Just get close enough.
When it comes to the rules themselves and your implementation of them, it is simply not worth your time or stress or energy to worry about getting them perfect every time, or even one time.
Some rules are better than none. Some automation is better than none.
Once you create rules, and especially once you automate, there’s this big part of your brain that will suddenly not have to be constantly, low-level thinking or worrying about your finances. Imagine what you could do with that part of your brain instead!
Do you want some guidance, accountability, and thought partnership to figure out what rules are right for you? And perhaps some help implementing them? Reach out and schedule a free consultation or send us an email.
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Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Flow Financial Planning, LLC, and all rights are reserved. Read the full Disclaimer.