Be Selective When Automating Your Finances
Technology makes it possible to automate most financial tasks. With automation, you achieve efficiency and the removal of the primary obstacle to financial success — you. Without your participation, negative factors such as ego, procrastination, disorganization and emotion cannot sabotage progress toward your financial goals.
These advantages might tempt you to automate everything, just set it and forget it and give your time and attention to other activities. Don’t do it. Be selective in what tasks you automate. While automating contributions to retirement and savings accounts as well as the payment of bills with fixed monthly amounts makes sense, other tasks need your conscious attention.
Automate contributions to retirement and other savings accounts
Automation shines when applied to saving because the decision to save can be a difficult one when you have so much on which to spend your money. With automation, you only have to decide to save once at the time you set up the automatic contribution. From then on, that amount is deducted from your payroll check or withdrawn from your checking account and added to your savings account. You never see the money, so you don’t spend it.
If your employer offers a 401k or 403b retirement plan or other savings plan, enrollment automates your saving. Each pay period, your employer deducts your contribution from your paycheck and adds it to your retirement or other savings account.
If you do not have access to an employer-sponsored saving vehicle, you can have your financial institution transfer a specified amount of money each month from your checking account to a savings account.
Another way to automate saving is to buy an annuity contract and have the insurance company withdraw the monthly payments from your checking account.
Do not set it and forget it. Plan for an annual review of your automated contributions to savings accounts with an eye toward increasing the rate of saving by a percentage point or two each year.
Automate fixed payments
Automate monthly bill payments that are, by contract, for a fixed amount each month such as payments for life insurance, installment loans, home mortgage, rent and subscriptions. If you cancel a subscription, product or service, you only risk losing one payment.
To assure you have enough money in the bank to cover the payment of your bills, deduct all automatic payments from your checking account the first of the month regardless of the scheduled payment date. That way you will have the money set aside for them when they come due.
Don’t automate the payment of variable expenses
Having all of your bills paid automatically is convenient but also a bad idea. Do not automate payments for products or services such as utility bills and credit card statements whose monthly balances fluctuate with usage. Electronic payment is fine, just don’t make it automatic. You need to review those bills and statements for accuracy and to keep abreast of usage trends.
The best time to catch an error and get it resolved is before you pay the bill. What if a fraudulent charge appears on your credit card or a human or computer error adds several hundred dollars to a utility bill? You will catch such a discrepancy if you review the statement or bill before you pay it and avoid overpaying. But if you have automated payment, you won’t discover the discrepancy until after the fact. You will have to request a refund. In the meantime, you are short that amount of money. It could make the difference between the prompt payment of your other bills or late charges if such an error drains your bank account. In addition, your depleted checking account may trigger insufficient funds charges and other fees from your bank.
Minor errors can be costly over time
An overlooked error in a bill doesn’t have to be large to cost you money. In fact, small mistakes will cost you more in the long run. You will catch a big error and fight to get your money back, but with automated payment, small errors may go unnoticed. If, based on experience, the total bill is reasonable, you will assume it is correct and overlook an error of $5, $10 or $20. For example, if your credit card statement balance is normally between $500 to $700 per month, you probably will not question a statement total in that range. A few dollars in erroneous charges won’t stand out, but they still cost you money.
Bills for variable expenses contain opportunities to cut costs
A review of utility bills and credit card statements before you pay them can reveal opportunities for cost-cutting. Automated bill payment gives you no reason to look at the bill or statement; it has already been paid. You lose out on valuable information about your finances.
The hazards of automating semi-annual and annual bill payments
Think twice before you automate the payment of semi-annual and annual bills such as premiums for homeowner’s and automobile insurance, subscriptions for software licenses or services, memberships and so forth. Automatic payment or renewal opens you up to price increases that may go unnoticed. You will not consider shopping for a better value or evaluating the continued use of a software or service when renewal is automatic because you have been taken out of the process.
How to handle forced automatic renewal for annual membership or license fees
What about software licenses or services that require automatic renewal for yearly fees or annual membership? Businesses that require automatic renewal usually offer steep discounts to entice new users to enroll. Then they charge annual renewals at the full price, and often, with no advance notice and no opportunity to cancel and receive a refund.
To avoid being surprised by automatic renewal, mark a date on your calendar that is two months before your subscription or membership renews. If you do not plan to renew, cancel your subscription or membership at that time. Do not worry; the balance of your subscription or membership will still be in effect until it expires, but you will be off the automatic renewal hook. Don’t procrastinate. If a glitch occurs in the cancellation process (website is down, or you receive an error message), you may not have time to correct it before your account automatically renews.
If you plan to renew, confirm the renewal price at this time.
Avoid automated tracking of financial transactions
Avoid web-based personal finance software such as Mint and others that offer automated tracking of your finances. These services link all of your accounts (checking, credit cards, brokerage, etc.) and automatically post transactions. But convenience comes with a price: all of your financial information including user I.D.’s and passwords is stored in one place in cyberspace which makes these services a tempting target for malicious hackers.
Do not take unnecessary risks with your financial data; post your transactions to a spreadsheet or accounting program that resides on your hard drive. It will take time and discipline to record your transactions, but you will gain an intimate knowledge of your finances if you do.
Reject the temptation to set it and forget it
Remember that you are responsible for the prompt payment of your bills. Do not assume your automated payments are processed correctly each month. Pay attention to confirmation emails and statements that document automated payment.
When automating your finances, prudence trumps convenience. Don’t take the set it and forget it approach. The successful management of your personal finances requires hands-on attention in some areas. Take the time to give your attention to those tasks that benefit the most from it such as record keeping and reviewing your credit card statements, utility bills and other variable expenses before you pay them. Automate the rest of your finances. By doing this, you will maximize the results you get from the time you spend managing your money.
K.C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle (Double-Dome Publications, 1996).