Readers often e-mail me for tips on how to keep their finances manageable. There are so many options out there that it can be overwhelming. I was speaking with my mom about this some time ago, and she felt the same way.
My mom has been responsible with her money over the years, but she felt that she could be doing better. After chatting with her, we decided that she should switch banks and automate some of her bills. It would free up some of her time and take a few things off of the to-do list… wins all around. I was talking with her the other week, after she had implemented the new system, and she said she’s really happy with her decision. She has saved both time and money with her new bank and online bill pay.
Why do I love automating my finances? Well, why wouldn’t I? Automating your finances can be a wonderful process, if done correctly. For one thing, it puts me in control of my bills without having to deal with paper, stamps, envelopes, and checks. But there are plenty of other reasons to love automating my finances, too. Here are my favorites.
I don’t pay late fees
I used to occasionally lose bills or forgot to send checks whenever I had a very busy week. Late fees definitely add up, and can be as high as $29 to $39 for credit cards! Sometimes I can pay my credit card accounts online for a same-day payment, but if I’m a day late, I may still get a fee imposed.
With online bill pay, you don’t have to worry about late fees because your bills will get paid on time every month, without any added work on your end. We’ll talk more below about different options for setting up automatic bill pay. But for now, just know that in exchange for a little effort up front, you can reap the benefits of avoiding late payments… forever.
Late payments don’t hurt my credit score
Getting rid of late payments isn’t just good for saving money by avoiding late fees. It also helps keep my credit score high. Payment history makes up the lion’s share of most credit scoring algorithms, and even a single late payment can quickly tank an otherwise excellent credit score.
Again, there are several options available for automating payments. But any of these options can keep you from having late payments recorded on your credit file, which helps you build your credit score or keep it high.
I’m saving money, and I barely notice
In the past, I would save money for a few weeks and then have an emergency. After getting through the trouble, I’d neglect to re-start my savings. This cycle would repeat over and over. I felt like I couldn’t possibly save more money without cutting my budget to the bone.
How did I fix this issue? Automation, of course!
Now, I have a portion of my pay automatically transferred to a high-yield savings account each time my check hits my account. The trick to making this work is to make sure the transfer happens before you can even check your account balance on payday. It’s hard to miss money that you never had a chance to see!
But don’t be a hero. Start out with just a small transfer. Then, as you get used to that slightly thinner paycheck, increase the amount slowly over time. Just be sure you’re transferring those funds to a savings account with as decent a yield as you can find.
Retirement savings is a cinch
I started saving for retirement early on, while still in college. Unfortunately, I got distracted, and my savings became sporadic as I got into debt. Getting back on the wagon was tougher than I thought.
Saving for retirement automatically is easiest if you have an employer-sponsored retirement plan. But you can do it even if you primarily invest in an IRA or another individual account.
If you have an employer-sponsored plan, call your company’s Human Resources department and sign up to have 401(k) contributions automatically deducted from your account. You should especially do this if your company offers matching contributions. Even if you’re trying to get out of debt, contribute at least enough to maximize that matching contribution. Otherwise you’re just leaving free money on the table!
Want to increase your investments even more? Consider sending a small portion of your paycheck to a traditional or Roth IRA.
My bank account stays steadier
If you have plenty of padding in your checking account, this may not matter. But if you’re living paycheck-to-paycheck or just a bit beyond that, it can be a boon. By making automatic payments around payday, I keep my checking account balance from skyrocketing and then plummeting.
In fact, you can smooth things out even more by paying some of your larger bills twice a month if you’re paid bi-weekly.
Pay half the mortgage with your first paycheck, and half with your second paycheck. This keeps your account from taking a big hit when you pay the full mortgage. And it has the added bonus of paying off your mortgage more quickly, since you’ll make an extra full payment by the end of the year.
This doesn’t just work with your mortgage, though. Bi-weekly payments can smooth out your bank account balance and pay off just about any debt more quickly and efficiently — without making it feel like you’re paying extra.
Some drawbacks to automation
Even though I love automating my finances and the effect that this strategy has had, it’s not the be all, end all of budgeting and financial management. It does have some drawbacks to consider, including:
- Possible overdrafts — If you’re on a tight budget or have an unsteady paycheck, you run the risk of having a payment drafted when you don’t have enough money in your account to cover it. Overdraft fees can be even worse than late fees! If your cash flow is really tight, you may want to find some breathing room (by cutting expenses, paying down debts, etc.) before you automate all of your finances.
- Time to set up — Automation does take some significant time to set up on the front end. However, once it’s set up, you’re good to go unless you need to tweak something — which doesn’t take much time.
- Missing problems with your bills — It’s much easier to miss being over-billed for certain services if you’re automating the payment. One way to avoid this is to only automate those bills that don’t change, like your mortgage or car payment. Or you can use a platform that gives you advance notice of the amount that will come out of your account. If you notice a bill is suddenly much higher than it should be, you can look into the issue as needed.
How to automate
There are loads of ways now to automate everything from bills to savings to retirement investments. Here are a few options you might consider:
- Paycheck deductions — For accounts like your employer-sponsored 401(k) or HSA, your easiest option is probably to set up automatic paycheck deductions. Talk to your HR department to get this done.
- Bank bill payment — Many banks offer automatic bill payment services where they’ll cut a check or send an wireless transfer to cover your bills. You can normally set this service up online through your bank account management tool.
- Third party services — Services like Mint.com offer automatic bill payment that works similarly to your bank’s service.
- Through the creditor or utility’s website — You can often set up automatic payments through your creditor’s or utility’s website. Log into your account, and set up automatic payments to recur on a set day of each month. Often times, new creditors, insurance policies, or other entities give you the option to set up automatic payments when you first open your account.
- Automatic transfers — For automatic savings or investing, you can often set up automatic transfers from one bank account to another bank account or investment account. This is super simple when you’re transferring money from a checking account to a savings account at the same bank. But it’s not difficult to set up automatic ACH transfers to accounts at another bank, either.
Learn More: 15 Ways to Supercharge Your Finances This Year
How about you? Do you automate your finances? Let us know what works for you, and how it has improved your day-to-day finances, in the comments!