Freedom 101: How and Why I Happily Set My Personal Finances on Autopilot

by | Jul 4, 2021 | Money

Is your adjusted gross income (AGI) less than $129,000 as a single person or $204,000 if married and filing jointly? If so, you’re eligible to contribute the max (as of 2022 tax laws) into a Roth IRA!

Beware: some financial gurus will tout the “danger” of putting your finances on autopilot. That’s because they want you to work with their “free” financial professionals. For all the deets on why you want to avoid these people, just check out the Frontline special “The Retirement Gamble” in the Resources tab of my blog and you’ll understand why it’s best to run far, far away from any “free” financial planner.

If you’ve read anything from the FIRE movement, you know it stands for “Financial Independence Retire Early.” A staple of the FIRE community is to invest in the Vanguard Total Stock Market Index (or VTSAX). That mouthful of alphabet soup tracks the top companies in the U.S. stock market, so you don’t have to try to pick the winners. Using a low-cost index fund like VTSAX buys a bit of the entire market every month (called “dollar cost averaging”). This diva wisdom has proven time and again to outperform the hot-mess, high-commission financial planners who claim they can beat the market. Spoiler alert: they can’t.

But if you aren’t comfortable with the very-popular $VTSAX as a set-it-and-forget-it solution, then you may want to pick a target date fund for the year when you plan to retire. Here’s a list of the target date funds by Vanguard, which have been recommended by some very smart people in the FIRE community. A target date fund will steadily transition your portfolio into less volatile asset classes as you get closer to retirement.

As the FIRE community would say, just keep it simple and let the U.S. market and compound interest do all the heavy lifting for you. And rather than take financial advice from slimy slimeballs who just want a commission of your hard-earned money, take a tip from Einstein instead. Yup, that Einstein!

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

Albert Einstein

Mathematician/Smartypants

For a peek at what Einstein was talking about, below is a projection of what $500/month can grow to over the course of 34 years. This is a real-life look at the magic of compound interest. And these numbers are very realistic. (Note: the spreadsheet below assumes an annual return of 8%, which is what VTSAX has averaged since inception.)

Roth IRA projections at 8 percent growth

Pretty sweet, right?!!! Just by scraping together $500/month, your $204,000 in contributions have the potential to grow to over A MILLION DOLLARS! And because these contributions are going into a Roth IRA, that means you’ll be able to withdraw the entire balance tax-free once you hit the ripe age of 59 1/2.

Which is still pretty young. I mean, after all, 59 1/2 is the new 49 1/2!

Tax-free withdrawals are a powerful thing when you stop and think about it. Just imagine, if that same $1,000,000 was earned in a standard brokerage account, it would be treated like regular income and get taxed at around 35% between federal and state. In short, if you were withdrawing that entire amount at 59 1/2, you wouldn’t really have $1,000,000. You’d only be left with $650,000!

To win at the investment game above, I knew I needed to create a monthly investment allotment so I could just set it and forget it. Then, after knowing I’d maxed out my $6,000/year in Roth IRA contributions, I could continue working my Atomic Habits realness and be on the lookout for new ways to make 1% improvements in my savings rate over time. Today, as I write this post on Independence Day, I have to say: having my monthly Roth IRA contributions set up gives me peace of mind knowing my retirement is on track, and that gives me the feeling of true freedom.

Let’s say you’re FIRE’d up to put your investments on autopilot but don’t know where to start. The screenshot below comes from a tutorial from Vanguard on how to set up automatic investments with a personal investment account. But hold up, Seabiscuit… there are actually 4 steps they don’t mention. If you, too, want to set up auto-investments into VTSAX, let me save you the frustration I went through, so you can get your fabulous investment horse off to the races even quicker.

This is what Vanguard calls the first step, but I found there are actually 4 steps before this...

STEP 1

You might roll your eyes at this step, but if you’re new to Vanguard, you’ll need set up a Personal Investor account with Vanguard and set up a Roth IRA Brokerage account. Here’s a direct link where you can do that: https://investor.vanguard.com/home

 

STEP 2

Before you can set up automatic investments into VTSAX, you first need to purchase it’s minimum, which is $3,000. To do this takes a handful of sub-steps:

    • Click the header that reads “My Accounts” and from the drop-down menu,
    • Click “Buy & Sell,”
    • In the box that reads “Invest with Vanguard mutual funds,” click the button for “Buy funds;”
    • Check the box that says “Add another Vanguard mutual fund;”
    • In the first text box, type in “VTSAX;”
    • Insert “$3,000” in the field for your initial investment;
    • Click “Continue.”

STEP 3

Select “Add a new bank” to set up where this initial $3000 (and the future automatic monthly deposits) will come from.

 

STEP 4

After successfully transferring over $3,000 into VTSAX, log out of your Vanguard account. This will allow the account to refresh so it will recognize the last series of steps.

 

And now…

And NOW you can follow the tutorial from Vanguard on how to set up automatic investments. https://support.vanguard.com/tutorials/automatic-investments

My favorite personal finance book, The Automatic Millionaire, says to create systems so your savings are on autopilot. That way, you do it once and you’re done. Similarly, most people interviewed on the podcast “Millionaires Unveiled” say they don’t have a budget dictating their lives. Like me, they just set up systems to hide money from themselves.

 

Then, after paying myself first, I can spend what’s left and do it guilt-free. Why? Because every extra dollar at that point is just that: extra money. And who doesn’t love to be a little “extra” sometimes?

 

And now, with my Roth IRA contributions on autopilot with VTSAX, I can focus on the important things in life… like David Rose-style 8-part skin care regimens, boozy brunches, and researching when RuPaul’s Drag Race will bring a live show to my town. Happy investing, Moneymakers!

2 Comments

  1. Todd Carver

    Ok I’m hooked..been reading through your blog and many articles. I’ve decided this next year is a fresh start so I’m getting in your wagon….going to start with the VTSAX and go from there. We’re also closing on a new house in NC (transferring up to the coast) and looking at your 30 year/15 year articles (but had already been following your pay extra concept as discussed). Really wish I would have met you years ago but better late than never….

    Reply
    • H.M.

      Awesome! So glad you found the blog and that you’re feeling motivated to set up VTSAX on autopilot. Vanguard doesn’t have an affiliate program, but I always recommend them over the competition because they’re the best for having such low fees. As you know from my article, the great thing about VTSAX (over VTI) is that you can set it and forget it, with the money you contribute every month automatically buying shares of VTSAX without your needing to do it manually after Vanguard has pulled it in from your checking account. Because VTSAX requires a $3,000 minimum investment to get it started you actually might want to get it set up before the end of 2021. That way, you can just set up $500/month for your ongoing contributions starting in January 2022 and not have to worry about going over the $6,000 contribution limit for 2022 and beyond.

      Reply

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