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Wednesday, April 9, 2008

Out of Sight, Out of Mind - Direct Deposit


Everything is becoming automated as computers take over the world. Thankfully, the human species is not yet to this point. Although it may not be such a bad thing if it had some financial automation.

Payday comes and we are handed a check. We go to the bank, cash it, maybe put a little away for safe keeping, and find ourselves spending most of the money before the weekend is over. Hence the reason cash is also known as "liquid." We just can't seem to hold on to it very long before it is spent on the latest movie or a new piece of furniture. Even as a child I had a hard time finding my money jar quick enough to drop the coins in before losing them.

Today most companies offer direct deposit paychecks. If you're not already taking advantage of this, you should be! A simple one-time set up puts your paycheck directly into your bank account. Depending on your employer, you may be able to set up a deposit to multiple accounts.

I no longer do the math. I simply modify the percentage I want deposited into my individual accounts and it happens. The most important part is that I don't initially see this money unless I look at my pay-stub, and by then it's usually already deposited.

The key is to take at least 10% of that which you earn and put it in some sort of investment. This could include a mutual fund, 401k plan, or even a savings account. Start by putting 10% away, out of sight, and it will be out of mind. Of course high yield accounts such as mutual funds and 401k plans will produce more money in the long run, but if all you are in the mood for is your low earning savings account, that will make do. At least it will make more interest than money stuffed in a drawer. Later posts are sure to have more on high yield accounts.

Using direct deposit allows you to start a small savings without really thinking too hard about it. Imagine all the money that the government calls tax. It is commonly withdrawn from your account before you even touch it. This translates into less spending because you are receiving less in your paycheck.

Homework for next time:
1. Set up a direct deposit account
2. Directly deposit 10% of your net income before you see it
3. Repeat number 2 every payday

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