When it comes to handling personal finances, there are two kinds of people: those who take care of it manually, and those who automate everything. Manual people tend to be more controlling, constantly checking balances and physically transferring money from account to account. Automated people are a bit more laid back; once they set it up, they forget about it. One requires constant attention, the other only sparing check-ins. Me? I’m a mix of the two.
On Lifehacker today, I came across this article asking whether you should automate your finances or not. The article does a good job of explaining the pros and cons of automating your finances: less effort, no need to remember to pay a bill, and instilling better financial habits are just a few of them. For example, if you set up an automated transfer between your checking account and savings account, you can pay yourself right when you get your paycheck and not need to worry about saving it at the end of the month. It’s automatically taken out of your account, so you don’t even see it.
But should you automate ALL of your finances? I’d say not necessarily. One thing to consider is your free cash flow each month. Do you have enough cash in your checking account to pay for all your monthly expenditures? If not, then you shouldn’t automate. Think about it like this…let’s assume your paycheck is for $2k net, paid out twice a month. You get paycheck #1, and have to pay out your rent, utilities, credit card bill and car note. If these things total $2500, then automating your finances could lead to overdrafts and fees. You want to make sure you have enough cash in your account to cover everything.
I would argue that certain things can be automated, while others shouldn’t be. Monthly expenses that don’t change can be automated, provided you are comfortable with your cash flow. Rent is a good example; I have my rent set to be paid out of my account on the 1st of every month. The amount doesn’t change, so I can be confident. Savings is another one; the concept of paying yourself first works very well with automation. As I said above, set up an automatic transfer between your checking and savings, and you’ll never even see the money. If you can’t see it, you can’t spend it. I have my payments to my emergency fund taken out via automatic transfer.
I am a firm believer that credit card payments should NOT be automated. Nor should cell phone or cable bills. The reason is that these things can change from month-to-month, and they also tend to have a great deal of issues. Cell phone bills are notorious for having random charges, usually from a thing called cramming. And cable bills seem to ALWAYS have random charges on them, requiring a call to take care of. If you automate these payments, you may not see them until after you have paid them (if at all). I think credit card payments are the best example. I charge everything to my Chase Sapphire Preferred card, and I pay it off twice a month (it’s a psychological thing, I hate seeing high balances so I pay it off more frequently). If you automate your payment, you won’t see any errors on your bill. But more importantly, I think you miss out on looking at your balance and seeing where your money is going. Automation removes you from that gut check. You may not realize that you spent $800 at the bars, or $500 on clothes last month.
One particular area that I think automation is a good thing is retirement savings. Obviously 401k plans and other employer-sponsored plans are good examples of this. So is the emergency fund. If you set up an automatic transfer to a Roth IRA or a brokerage account, it makes saving for the long term much easier. If you wait until you need to do it manually, you may not do it at all. Or worse, you end up spending it all before you get a chance to save it!
So that’s my automation plan. Constant expenses and savings get automated, while fluctuating bills are paid manually (albeit online). What about you? How much are your finances automated?