Moore for your Money
BYRON MOORE, CFP®
Question: I struggle with follow through. I’ve made several financial promises to myself, but I just don’t keep up with the details. The only thing I can say I’ve ever done consistently is my 401K, and that’s because it happens automatically and I never think about it. What can I do to improve my follow through?
Answer: Make it automatic. Like that 401K of yours.
We tend to overestimate the value of the big commitments we make in a rush of conviction and enthusiasm. Conversely, we tend to underestimate the value of small but growing habits we practice over time.
Try this simple idea: use a wealth coordination account (WCA).
A WCA is just a checking account that is dedicated to your wealth building efforts. It acts as the Grand Central Station of all the flows of money that are now coming into and going out of your financial life – you just don’t have an effortless way to keep track of them all.
Now you do.
Your WCA is not your household checking account. It isn’t your savings account for vacations, tax payments or that cosmetic surgery you want.
It is for long-term wealth building. So keep everything else out of it.
Since most people are plagued by debt and have no plan to extricate themselves from its slavery, let’s deal with it first.
But didn’t I just say to keep everything out of the WCA that isn’t long-term wealth building? That’s actually the point. The monthly cash flow you are now sending to the credit card company needs to eventually be re-routed back to you. The way to make that happen later is to start running that cash flow through the WCA now.
Let’s say you owe $1000 on a credit card and you are paying $100 per month to the card company. With the WCA strategy, you’re going to have your bank automatically transfer $100 each month from your household checking account into your WCA. Then you will also set up an automatic payment from the WCA to the credit card company. In about eleven months the credit card company will stop accepting those payments (the card will be paid off), but you will continue those automatic transfers from your household account into your WCA – very much like you do with your 401K each pay period. It’s automatic and you hardly (ever) think about it.
Without the WCA, that cash flow now going to the credit card company will wind up staying in your household account and (in all likelihood) being spent. In fact, you’ll wonder how you ever got by without it.
Do you save money systematically now? Great – put it into the WCA first.
Do you invest in mutual funds on a regular (monthly) basis? Set up an automatic draft from your household account, to the WCA, then to the mutual fund. That way you can keep track of what you’ve done.
Do you have rental property? Rents in excess of your operating expenses can be deposited into your WCA.
Do you get an annual bonus? Are you expecting a tax refund? Don’t deposit it into your household checking account – that’s like putting a post-it-note on a dollar that says “spend me!” Deposit it into your WCA.
Do you earn dividends and interest off of taxable stock and bond portfolios, or mutual funds of the same? Consider having the interest and dividends paid to your WCA. That way you can decide if re-investing back into the same portfolio makes the most sense.
Overtime, deposits will tend to continue going into the WCA, while some withdrawals will cease (like debt payments). As this automatic financial snowball keeps rolling, it will gain size and speed. But rather than simply letting it accumulate inside the WCA, on a regular basis you’ll want to redeploy that capital in a balanced, diversified way throughout your financial plan. It may be used to shore up your protection, rebuild savings or invested to grow.
Don’t leave your financial success to chance or even good intentions.
Automate the process, starting with a wealth coordination account.