When you’re setting up your finances to help your household succeed, one thing that many financial planners and experts suggest is to create a plan that takes out the human element when possible.
Automate your finances to make sure you do the things you need to, instead of hoping you remember to follow through.
While the degree to which you automate your finances can vary depending on whether your services allow you to schedule payments or deposits, we all have plenty of ways in which we can simplify and automate our finances.
Today I thought I would talk about some reasons why you may want to automate your finances, and then explore a few concrete ways that you can get started down this road. First, let’s look at why it might be a good idea to set up a financial system and automate it.
Here’s our discussion of automating your finances from this week’s Money Mastermind Show.
Reasons Why Automation Is A Good Idea
Putting your finances on automatic can help you to go from a place where your savings are underwhelming, and your investment accounts are not fully funded, to a place where you can begin to ensure your family’s financial future.
What are some good reasons for automating your finances?
- It simplifies your life: By automating your finances you can make following through on our financial plan much easier. Instead of having to think about paying your bills and saving for your retirement and savings goals every paycheck, those things can just happen automatically. Far too often our plans fail because they’re far too complex and require us to do more follow-through than is necessary. Simplify and make your life easier through automation.
- You lack discipline: If most people are honest, they lack the discipline to regularly make transfers to their savings and retirement goals if it’s a manual process. By automating that process with every paycheck you can put your savings and retirement goals on auto-pilot, and the only discipline you need is to actually start the automation in the first place.
- It will save you time: Instead of having to spend hours on end every month tracking your finances and worrying about paying your bills, saving, and tracking – you’ll be able to just verify that all of your automatic processes took place that month, and move on to something else.
- It will give you more peace of mind: Having to worry about your finances every month can take an emotional toll as well. It can be draining. Did I pay the mortgage? Did my cell phone bill arrive on time? Did I forget to make my retirement account deposit this month? When your processes are more automated, there are fewer variables to worry about.
- Putting savings on auto leads to higher rates of savings: A study from the National Bureau of Economic Research found that making something the default action, leads to higher participation. In the study, they found that making the 401(k) accounts opt-out instead of opt-in (meaning you were automatically enrolled in a 401(k) unless you specifically opted out), raised contribution rates from less than 40% to almost 100%. Having something be automatic matters.
- It can save you money: Putting your finances on automatic can save you quite a bit of money because you’ll have no more late fees, you’ll be able to save on fees with services that give discounts for automatic deposits and your bank and retirement accounts will grow faster than you realized was possible.
We all would like to think that we will make the right decisions and save and invest for our future. The truth is, however, that if we don’t automate those financial decisions and put a system in place, they often won’t happen at all. We erect passive barriers in our minds and take the easiest path – which often is just to do nothing.
One study of companies that held financial seminars for employees showed that attendees who hadn’t enrolled in a company 401k, intended to finally start contributing to one in the next few months. When the researchers later checked actual enrollment rates, only 14% of those people had actually enrolled. Without having the process be automatic, they made the passive decision and made no decision at all.
The same will often go for savings and investments. If you don’t make one active decision and set up some sort of an automatic process and system, you’ll likely make the passive decision and do nothing at all.
Things To Wary Of When Automating Your Finances
If you do decide to go down the road of more automation for your finances, there are still going to be pitfalls to be wary of. Here are a few:
- Complacency: If you’re not careful, having your finances automated can lead to a sense of complacency where you never follow up with your monthly budget and don’t stay on top of where you are in regards to your goals, how much money is in your accounts, and whether you have problem spending areas. To avoid problems make sure to still do at least a monthly budget check-up, balance your accounts, and ensure that all automatic processes that you’ve set up have in fact taken place. Automate, but verify and optimize.
- Errors If you’re using autopay, errors can still happen. The National Automated Clearing House Association (NACHA) says that the error rate for bill payments that travel over their automated network is 38 per 100,000 bill payments. So errors do still happen. If an error happens, the bank must credit the customer account, but you need to inform the bank within 15 days of receiving the bank statement with the error on it. So staying on top of your accounts and checking for errors is important, especially if you have a large number of automated payments pulling directly from your accounts.
- Expiring cards: If you’ve got bills set up to be paid with a credit card, many people often forget that credit cards expire. When the cards expire you need to replace the old card number and expiration date with your new card’s number. If you don’t, your bills may go unpaid, and your service could be turned off. Avoid this by staying on top of which cards are used where, and making note of card expiration dates.
- Services that don’t stop when intended: There is always the chance when you set up automatic billing that a company whose service you’re no longer using could continue billing you for their service. When you have an auto-draft setup with the company, they may end up continuing to pull money from your account without your consent. Be wary of direct account pulls for that reason.
Simplify Your Finances
Before you go down the road of automating your finances, it can be a good idea to simplify your financial situation where you can. It will make things easier to track once you do start automating things.
So what kind of things can you do to simplify your financial life?
- Consolidate bank accounts and credit cards: A lot of people will end up with multiple bank accounts, 3 or 4 brokerage accounts, 4 different credit cards, and more. You may want to consider consolidating those accounts and even dumping a few of the ones that you’re not using, especially if they’re charging you fees.
- Cancel unneeded accounts and services: When you look at your monthly spending you’ll likely find that you’re paying for accounts or services that you’re no longer using. Cancel unneeded services and you won’t need to worry about setting up automatic bill pay for those services.
- Track spending and set up a budget: In order to automate your finances, you’ll need to know just where the money is going, and how much you’ll need to have available every month. Set up a budget using software like YNAB, Tiller Money. or Mint.
Automate Your Budget
Once you’ve consolidated your accounts, and pared down the services you’re using, it’s time to set up a budget. Luckily there is plenty of software out there that can help you to automate the process of setting up and maintaining a budget. My favorite is You Need A Budget (YNAB) (Get a $6 discount through my link).
With YNAB you set up a monthly budget for your household where every penny is allocated to either a giving, saving, or spending category. To do this you’ll track your spending for a month or two and see where the money is going. You’ll find out how much you’ll need from month to month, as well as find out which categories you’re overspending on so you can work on cutting back on those areas.
Once you’ve set up a reasonable budget where all money is allocated, your budget will then essentially be automated every month. You can either download your transactions from your banks or just enter transactions into the desktop software or mobile app as they happen. YNAB will then give you regular reports on how you’re doing on your budget. It’s a great way to automate a zero-based budget.
Another great way to automate a budget is to use a financial aggregator like Mint.com. You can set up budget categories on their site, and then set up all of your financial accounts. It will pull all your transactions automatically and the transactions will automatically be assigned to budget categories. You’ll be able to see how you’re doing with a quick glance. After a little bit of setup, it’s a great way to stay on top of your budget with minimal effort. You can also set up alerts when you hit limits in certain categories, when a bill is coming due, or when other trigger events happen. A good automated way to keep your budget in line.
Sign Up For Direct Deposit
Contrary to what you may have been told, a wealthy person’s secret weapon isn’t discipline; it’s systems. My wealthiest clients who built fortunes without the benefit of an inheritance were systematic investors. Each spent far more time earning money than shepherding it and were great savers because they’d created alerts, spreadsheets and applications to quickly help them manage their financial lives. – Joe Saul-Sehy (source)
After setting up a budget, automating your paycheck to be direct deposited is a good first step on getting the automation process rolling.
While most people have a direct deposit setup these days, one thing you might want to consider is setting up your direct deposit to go into a savings account, instead of checking. Once the paycheck arrives transfer money over to a checking account for monthly bills and spending. Why?
When you put the money directly into savings it creates an automatic savings component where people are more likely to only transfer what they need for bills/spending to checking. They then end up saving more because the unassigned money isn’t just disappearing into the checking account either.
Joe Saul-Sehy of Stacking Benjamins says that he used this as an effective strategy for his clients when he was a financial advisor.
If you have direct deposit, use it to funnel money into your savings account instead of your checking account. Transfer money into your checking account to spend. Most people suffer from “I can’t save” syndrome because they want extra money in their checking account “just in case.” I’ve found that you can use psychology to your advantage here. By directly saving money and then transferring it to spend, you’re more likely to leave your cash alone.
So set up that direct deposit to your savings account, and then set up an automatic transfer to checking a couple of days later for normal budgeted bills and expenses. No more overspending in that “miscellaneous” category.
Automate Your Savings Goals
Automating savings with a “pay yourself first” mentality is a great way to make sure that saving doesn’t get pushed off because of competing priorities.
David Bach, author of The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich suggests that his readers set up automated contributions to their savings and investment vehicles. He calls it his “tortoise approach” to becoming wealthy, and he highly recommends that you “pay yourself first”, setting up automated payroll deductions to avoid the temptation to use the money for other wants or needs. Setting aside the money from the get-go means that it never even enters the equation as a possibility to spend – and in the long run, your spending adjusts and you don’t miss the money anyway.
So how can you set this up? For me, I use my Capital One 360 bank account for all of my savings goals. Capital One allows you to set up separate savings accounts – as many as you want – for different savings goals. For us, we have one account for “vacation spending”, one for “next car”, one for “emergency” and one for “house down payment” (which we have since spent).
Setting Up Automatic Savings
If you want to set up automatic savings by category for yourself, it’s easy. Just follow these steps:
- Open an account with Capital One 360 here.
- Click on the “+ Add new 360 Savings” link in your account dashboard to add an account for each savings goal.
- Click on the “Automatic Savings Plan” link in your account dashboard to set up an automated monthly transfer to whichever account you want.
- Setup the transfer. Choose what amount you want to be transferred, to and from which accounts, and the date on which you want the transaction to happen.
We have our automatic savings set to happen several days after the first paycheck of the month arrives. So now we have our savings goal accounts growing every month until we need them, at which time the money is ready to spend!
Setting up automatic transfers at other banks will happen in a similar way, and it’s usually done in just a couple of clicks.
Another option is to use a service like Qapital. Qapital is a new savings account that has a unique feature. The account gets linked to your checking account, and throughout the month it will analyze your regular bills and other monthly spending. After it has analyzed and decided how much you won’t miss, it will transfer small amounts of money to your Qapital savings account.
By the end of the month, those small savings amounts add up. It’s a good product for those who aren’t good at saving on their own, it’s a way to hack your way to savings. Read a full Qapital review here.
- Capital One 360 Savings Account
- Qapital Automated Savings Account
- Rize Money Automated Savings
- Best Bank Rates
Automate Your Investing
To ensure you have enough for retirement, make sure to automate your investing.
First, if your company offers a good 401(k), and especially one with a match – invest in that automatically every paycheck. Your HR department can set that up for you and you’ll never even see the money – so you won’t miss it.
Next, use an investing service that will automatically invest for you, and then automatically re-balance your portfolio on a regular basis.
I have an account with Betterment, and it automatically deposits money into my Roth IRA every month on the same day, investing my money with no intervention from me. It invests in a fully diversified portfolio, and I never have to think about it after setting it up that first time.
How can you automate your investments with Betterment?
- Open an account with Betterment here.
- Go to your account dashboard and click on “Transfer”.
- Make sure that “Automatic Deposit” is turned on for the account.
- Click on “Deposit settings” and choose the amount of the deposit, frequency and day you want your auto deposit to happen.
Once you’ve set that auto deposit up, you’ll be set to go moving forward. At our house we’ve got the auto transfer for the Roth IRA set to deposit $450/month, so we come close to maxing out the IRA for the year.
Monitor your investments with minimal hassle
If you’re using multiple investment accounts (A 401(k), a Roth IRA and maybe an IRA), consider aggregating and monitoring your investments using a service like Empower Personal Dashboard. With Empower you can enter all your investment accounts in one dashboard and then regularly check to see how your portfolio is doing. You can also do a quick checkup of the fees you’re paying for the funds you use, and in some instances even get financial advice from their advisors. So while your investments are automatic, you can still stay on top of them and monitor them with minimal hassle.
Automate Your Bills Being Paid
Another area that can be a great place to automate is with your regular monthly bills.
Using a credit card
Many services will allow you to set up automated billing on their website, and some of them will let you use a credit card in order to make your payments. Services like Netflix, cell phone companies and others will allow you to use a credit card, and you can earn cash back rewards on those bills as well. Just make sure that you’re paying that bill in full every month. Ensure that happens by setting up monthly auto-pay with your credit card. You can link your checking account and have the card automatically paid off every month.
Using a credit card you also have the added safety of not having to worry about billing errors taking extra money out of your account, or losing money due to identity theft or fraud. Credit cards will typically have more protection than checks and/or debit.
Using a credit card for automated billing also allows for variable bills that can’t be accounted for with bill pay. So for example, if your cell phone company allows you to setup auto billing for your prepaid cell phone, and in different months you have different billing amounts – the credit card can account for that.
Using bank account auto-draft or checks
For bills that don’t accept credit cards (many utilities, taxes, mortgage, rent), you can still setup automatic bill pay with a service like MyCheckFree or directly through your bank. Often those auto payments can be pulled directly from your bank account on a set schedule. Just be sure that whoever you give access to pull funds from your account is a trusted source. Otherwise you can run into problems where they’ll accidentally or purposefully overdraft your account, leaving you holding the bag.
Some bills you may still need to pay manually, especially if they require a check. The number of services that only allow checks is dwindling, however.
Automate tracking of your bills
Automate the tracking of all your bills in YNAB, Mint or a similar software so it always gets entered into your budgeting software, without the need to enter them manually. Just make sure to edit and enter the correct amount for bills that are variable. Always verify that automated payments have gone through.
Automate Checking Your Credit
If you’re in the midst of trying to buy a house, or some other situation that requires the use of credit (which I typically discourage), it may not be a bad idea to sign up for one of the free credit checking services.
Among my favorites are Quizzle, Credit Karma and Credit Sesame, all of which are free to use and give you a free credit score from one of the 3 credit bureaus. Some of them will also give you free credit monitoring.
If you really want to automate checking your credit you can download the credit score apps from these companies and receive push notifications on your phone when your credit score changes or certain changes to your credit happen.
Of course it’s always a good idea to check your credit reports every year at AnnualCreditReport.com as well.
Setup Automatic Bill Reminders And Alerts
If you have bills that still need to have physical checks sent, or if you need to manually trigger a payment to be sent, set reminders to pay your bills in Google Calendar. Put a reminder for the due date, and you can have Google alerts sent to your phone, email or other places.
You can also use Mint.com to send you bill reminders and alerts to your phone or email.
Synchronize Your Bills On Convenient Dates
Make automating your bills more convenient by calling your creditors and services to synchronize billing dates.
If you know you want to have half your bills auto-paid on the 15th, and the other half on the 31st call and synchronize your bills so that half are due 4-5 days after the 15th, and then the other half 4-5 days after the 31st.
Usually all you have to do to get this done is make a call to your biller and ask them about having a new billing date.
Make A Note Of What You Have Automated
If you have setup a system to automate your financial life, it’s important to make note somewhere of just what bills, savings goals and investments are set on auto-pilot.
Create a spreadsheet with all of your automatically paid bills, savings drafts and automatic investments, and on what dates they take place. Also make note how they are being paid, and from what account.
As I’m automating my finances I’m going to be adding a new tab to my “Total Financial Picture Spreadsheet” to make note of all automated transactions that take place every month. That way if something happens to me my loved ones will be able to follow what is happening in our finances, and stay on top of things.
Have your own easy ways to automate your finances? Tips or tricks? Tell us what they are in the comments!
I only automate the payments that are fixed amounts (mortgage, car, student loan) — the ones that change, I need to see exactly what is being charged and if it is an anomaly…investigate further.
B Simple says
Great consolidated list of resources and ways to simplify your finances. The last tip is a really good one to keep track of what you have automated. Reviewing your credit report is a good way to see what credit cards or credit accounts that are open which you may have forgotten about. Especially the ones you may have signed up for to receive 0% financing for a purchase. Also reviewing your credit report to make sure there are no errors on the report. You would want to get those cleaned up before you make that next purchase. Will simplify the purchase process if cleaned up beforehand. I will have to listen to the podcast also.
The Wallet Doctor says
I’m always worried that too much automation will make me lazy. I like feeling like I am actively tracking payments and the like. I suppose I could find other ways to manage those issues, and the convenience is a compelling reason to consider it, but I have yet to commit to full automation.
Peter Anderson says
I will admit that I haven’t fully automated yet either. I like having some of my finances kept on the manual side – so that I’m forced to stay on top of it every month. For the most part I have all of my savings and retirement goals on auto-pilot, and then some of the variable bills on manual. We’ll see, maybe down the line I’ll feel more OK with automating everything, but not now.
I have automatic payments for payments to my savings account. I like to make sure I am saving enough money biweekly and then I figure out what the extra money will go towards to. If I have more leftover money, I put that towards my savings account as well.
Anne @ Money Propeller says
I am in the “automate because I am super lazy” camp, myself. Remembering to check in on things every once in awhile is kind of tricky, thankfully things like my cell phone bill come with a text message telling me what I spent! If the number is out of what I consider an acceptable range, I go look at it and see why.