If you are looking for a way to automate and simplify the process of saving and investing, this amazing direct deposit split hack can help you. Traditionally, you would get your paycheck deposited into your bank account, and then manually or automatically transfer the funds to your saving and investments accounts. But there is an even better way to pay your future self: by completely removing the savings/investments portion out of the paycheck before you receive it, thus keeping them out of easy reach. You can accomplish this by following these simple steps:
Determine the Optimal Amount You Would like to Pay Yourself
The basic idea is that you are splitting your paycheck into two: one is for your “present self”, and the other is for your “future self”. So first, you would need to calculate how much money you can deduct from your bi-weekly check without hurting your monthly budget. Make sure to account for schedule expenses (e.g., rent or mortgage in the beginning of the month) and leave some “buffer” for unexpected expenses. And it’s always better to start with a lower amount and adjust it later.
Open a Separate Bank Account
Ideally, you would open an account with another bank – so you can’t easily shuffle money between the accounts. I call it “Pay My Future Self” fund. Make sure that account satisfies the following criteria:
- No minimum balance requirement
- No fees
- Allows for electronic (ACH) transfers
- Offers checkbooks
- Has ATM near you
Personally, I recommend 360 Checking® account with Capital One: no minimum balances, no fees, easy ACH deposits/withdrawals and they offer a free set of checkbooks. And I also have at least two branches of Capital One near my house and workplace.
Set Direct Deposit Split
Most employers have an online portal where you can manage your direct deposit; others will require you to fill out the paper form. In both cases, you will need the following information:
- new bank’s routing number
- your bank account number
- the amount of the desired deposit
You can now split your paycheck into 2 parts. The first part is a fixed amount that you want to go to your new bank account (your “future self”), and the second part is the remainder of the paycheck (your “present self”). Interestingly, most HR departments allow you to split your deposit up to 4 ways, so there are definitely more options there to play with. For example, if you and your spouse have a joint bank account (to manage household), you could allocate a portion of your paycheck to be sent to that bank account.
Use Your Separate Account to Allocate Investments
You can now use your new “future self” account for investments and side business ventures. Make sure to track all the transactions, just like you do with your everyday checking account.