“The number one financial mistake is not to have your finances on automatic.” -David Bach, author of The Automatic Millionaire.
I have been hearing and reading more about automating finances. Up until just a couple months ago, I hated automatic payments. I had tried it a few years back and it was an epic fail. I would forget about upcoming withdrawals and then be surprised when I logged into my bank to view my checking account balance. $4.23. What the hell am I going to do now? It’s still 10 days until payday! This was on a good day. There were other times when I would open up my email to see an overdraft notice. I would get so mad. After logging into my bank account, sure enough the overdraft was for an automatic payment that I had completely forgot about. I was so annoyed! After this had happened a few times, I got fed up, put a stop to all autopayments and cursed the system. How could anyone manage their finances like this? How ridiculous!
Fast forward to today and I have a whole new love for automation. Looking back at those times when I tried to automate (and there were multiple times!), I now realize that the problem was not the automatic payments. Autopay is simply a tool, I was just using it incorrectly. The problem was me. Talk about an epiphany!
Automatic payments are not meant to allow you to be totally hands-off with your finances, especially when you are living paycheck to paycheck. Their purpose is to not have to worry about scheduling payments manually as well as giving you the piece of mind that payments will be made on time. Here is what I have changed to make the system work for me:
Now that my wife and I use multiple bank accounts to manage our finances (See “Organizing Your Finances”), I have setup our direct deposit so that the correct amount of money is deposited into each account and then the remainder is put into our account we use for everyday purchases. It is impossible to manage the money going out if you don’t manage the money coming
For our credit cards, car payment and student loan payments, I have setup each account to automatically pay the minimums each month. This way, we know the payments are made on time. When there is extra money available, I then go through my bank’s bill pay system to make the extra payment. This way, I know that I don’t have to worry about late fees or penalties.
The best automatic transaction is my bi-weekly contribution to my retirement account. This is standard for most company-sponsored retirement plans. The great part about this is that I don’t even see the money hit my checking account. It is amazing to watch how fast retirement wealth can build when it is automatic.
I have also setup automatic payment for our utility bills. This way, I don’t have to worry each month about the water or electric. By making these bills a priority, I pay them first and the balance I have left is open to allocate as needed.
Another automatic transaction I have is a transfer into savings. This helps to grow my savings account each month without having to think about it. The other benefit of this is that by having an automatic transfer, I avoid having to pay a monthly account maintenance fee.
Review items on autopay
The last thing I have changed is reviewing my automatic payments bi-weekly. The reason I do this is to make sure there is enough in the account to cover all payments. Since I get paid bi-weekly, I review the auto payments that are scheduled 2 weeks out to make sure there is enough in the account to cover it. Since there will be another deposit in 2 weeks, I do not need to stress beyond that. (Yes, I do still need to plan, but not stress 🙂 ).
Using automation in my finances has made such a big difference. I am happy that I decided to give it another try. It makes things easy and less worrysome. It has also allowed me to free up some time to do other things, such as spend it with family or write new blog posts.
How has automating your finances helped you in your life? What has been your experience? What snags have you run into if any?