The NY Times has has an interesting article questioning how much of your finances you should automate (How Much of Your Finances Should You Automate?). In it, the author looks at the methods of some popular personal finance writers such as Ramit Sethi of I Will Teat You To Be Rich, Adam Baker of Man Vs Debt, and Jim Wang at Bargaineering.
The Argument for Automating Your Finances
Ramit Sethi’s technique is to automate everything he can from savings to Netflix to credit cards to things like rent. The reasoning here is psychology. As much as we would like to say we’ll take car of our finances, when it comes down to actually doing it we tend to not follow through. I can think of many times I said I would save but by the end of the month the money flowed out, the excuses piled on, and the savings stayed bare.
Automating, once set up, can also take the worry out of your finances. You know bills are getting taken care of. You know you have money going into savings and investing. You have more time to put your efforts into the rest of your life (like finding ways to make more money).
This isn’t to say automating is all “set it and forget it.” Ramit admits that he’ll make sure his checking can cover expenses when he receives alerts that a bill is due.
The Argument Against Automating Your Finances
On the other spectrum is Adam Baker who wrote the eBook Unautomate Your Finances (great read, by the way!). Adam argues that when your finances are automated it’s too easy to keep up bad spending. With automation, you aren’t conscious of your spending. Psychology is in play in Adam’s argument as well: When your finances are completely automated you don’t pay as much attention to your accounts. When you have extra money you will likely not pay extra towards debt since the payments are out of sight and out of mind (and the extra money can likely turn into more spending).
Jim Wang adds that automating could make you lazy with your finances. You may not check up on accounts like your 401(k) as often since it automatically gets contributed to. This can be a huge mistake long term, if you aren’t looking to re-balance your portfolio when needed or add to your account when you get raises. You can also get penalized if your checking account doesn’t have the funds to cover your automated billing which can cause more trouble than it’s worth.
The Place Right In The Middle
Where do I fall in this debate? I agree with both parties. I like to have a bill like Netflix automated since I know the charge will be the same every month. We also automate some of our savings so we know no matter what we have a minimum being saved.
That said, I don’t like to automate things like credit cards or anything that could change month to month. I want to look at these bills and see what the charges are before I pay them to a) make sure the charges are correct; and b) see where my money is going every month. I agree with Adam in that automating can make you less conscious of your spending.
Overall I think you need to find what works for you in automating your finances. Automating some aspects can save you time and effort but you need to also stay conscious of your spending to see where your money is going and make sure your charges and payments are correct.
Like you, I am somewhere in the middle. I prepay as much as I can, but not my credit cards. I do pay them off every month, but I want to feel the pain of paying those myself. I think the only other bill I don’t automated is my water bill, but that is because it is a huge hassle and I just haven’t done it yet.
“I want to feel the pain of paying those myself.”
Awesome imagery! Totally agree. When our bills are high we want to know exactly why they are high and what we can do about it. If our credit card payments were automated we might forget to check.
This is a tough decision, and definitely puts the “personal” in personal finance. I tend to agree with you, stuff that wont change monthly like netflix, internet and phone bills and student loans are all automated. I also automate some savings, but to make my debt snowball payment, I do that by hand. It’s much more fun to click the “pay balance” button when doing that.
It feels good to pay extra into a debt and see it go down, doesn’t it?
I think I’m in the middle with this as well. I pay all fixed bills on a schedule with my bank (including rent and my church giving). My credit card bills automatically get posted to the billpay section of my bank account. I then have the option to pay the minimum, full balance, or some other # after I review the bill. I have the option to automatically take one of those actions, but I’d rather review everything first.
No matter what, I review all charges in Quicken with my wife once a week.
Sounds like a good system for you and it’s great to hear your wife is involved in your financial decisions.
I think some people are confusing automating with ignoring your finances. In my mind automating simply means that I do not have to go and manually click each time a bill needs to be paid or savings need to increase.
I am about 97% automated (have to go in to pay rent because I refuse to pay the $10 fee for automatic credit card payment) but I still (almost obsessively) check my finances. I look at Mint every day and compare my receipts with what Mint updates but I do not have to go in and pay all those bills.
I have all bills paid via credit card and then I use ING to push a payment to those cards every week. I know there are fluctuating bills on the card but because of the way I pay I never carry a balance.
It really depends on the person. If you can get your bills paid automatically and still keep up with the spending as well then that’s great and it works for you. I think for many though, an automatic payment means it’s done in our minds and doesn’t need further looking into. This is where an auto-payment for a credit card can be dangerous.
In my case, what I would really like to automate is keeping track of where my money is, and how it has changed. I currently do all of this in a spreadsheet, but it’s starting to become complex and unwieldy.
Does anyone have any recommendations for decent software that can keep track of different accounts, calculate an IRR on an investment fund based on how the money has flowed in and out, and show me my asset allocation? I guess that would be a start!
I personally can’t vouch for any particular program but you can give Mint or Quicken a look and see of either of those fit your needs.
Consider that companies have spent a lot of money to automate payments. It stands to reason that they would not do this unless they can make money (most likely from people not canceling their services because it is convenient not to).
If we presume that companies serve “the average person”, then “the average person” DOES NOT benefit from automating their finances.
That said, obviously it comes down to personality type.
It is all about personality type.
I think one way it benefits companies is it gets them their money quicker then by mail. It also can result in a person not looking over all of their charges which could be more money for a credit card company.
Also, since auto-payments are becoming standard for many banks and companies, those that don’t have auto-pay risk losing customers to companies that do have the service.
Definitely automate for 80% of the things you’ve got, then manually adjust the remaining 20%, including saving more!
I have automated my finances, I automatically turn them over to my wife!!
She likes to keep the books, so who am I to argue. We have a few things on auto-pilot, but uses quicken and online bill pay.
I am going to start setting some things up in ING soon, just as an experiment.
So far, our small town bank is not on Mint’s list, though I like what I see there.
Haha, funny! My wife and I have certain bills that one of us always pays. It’s just a left-over from before we met really.
ING electric checking has bill-pay abilities. I also have a bunch of accounts connected to my Orange savings for online payments (manual though).
I agree with you about never automating your credit card. Not only do you need to make sure you have enough funds in your account, but you also want to make sure there aren’t any extraneous charges. If that payment is automated, you might forget to look at your statement.
I like to do things the old-fashioned way. Automating would make me nervous. If you needed to un-automate at some point, i don’t trust the technology to undo things right the first time. It could be a real headache getting that straightened out.
Some companies aren’t as up to snuff as others so I tend to agree there.
I agree with both Lulu and fern. Even if all your expenses are automated, it does not mean you should ignore them. Going through all the bills every month, even if they are automatically being paid for from your checking account keeps you aware of how much you are spending.
Take your phone bill for example. It is a good idea to go through it every month just so that it seems that you need all the services you are paying for. If you find that you no longer need unlimited texting or unlimited calling, then you can go ahead and change your plan.
@Jacob Fisker, your post is on key when it comes to variable expenses from month to month. Those are the most dangerous and can drain your checking account rather quickly if you don’t’ keep track of them.
I agree but I don’t think most people follow through with your logic in checking the charges on their bills. That’s why some things may better be left to manual payments. If auto pay works for you then that’s awesome.
I agree with heaps- even if my phone bill is automated, I make sure there aren’t any “overages” from the basic $28 a month I pay.
I do like to automate my savings though- it’s much easier than taking whatever is left over and putting it aside- because we all know that it’s quite difficult to be disciplined enough to make sure there is enough money at the end of the month to put aside.
We automate savings too but also add what we can when all is said and done.
I like the idea of automating your finances, especially if it keeps you from missing payments or things like that.
However, I do not believe you need to put things on autopilot either. You need to sign on and check accounts regularly for suspicious activity or otherwise. Also, if your income level changes, especially upward, consider increasing some of your payments on revolving accounts.
I know I’m behind the times, but I like to pay bills the old-fashioned way–a stamp on an envelope and in the mail. We were once burned on an automatic bill pay when we discontinued paying our private health insurance through auto pay because we were now covered by an employer for our health insurance. I notified the insurance company by phone and email, and they said they would discontinue drawing from our checking and close our account. They did not, however, cancel the policy. Long story short, we bounced two checks before we knew the insurance had not been canceled. The bank would not help us out–said they had not received notice from the health insurer. The health insurer said they told the bank. We were left paying the insufficient fund charges. After that, I said never again!
Ouch! Sorry to hear about that. You really have to be on top of what is drawn from which accounts and unfortunately, some companies aren’t great about following up.
I automate most of my bills but tend to do savings/investing manually. We have a variable income, so this really does require some degree of manual manipulation. I agree with the earlier comments that automation doesn’t mean ignore. Regards,
It’s about what works best for you. Automation can be a great time saver and help but you always need to know what’s going on with your accounts.
It’s funny, this post caught my eye today because I just wrote about automating to save money.
I think Lulu got it right on the button that automation is not the same as ignoring your finances. I manage my finances but I automate my budget. My principle is KISS (keep it simple etc). Automation of the duties is necessary but you also need to check and make sure that things are done right.
It’s not the same. One should always be on top of their budget/spending.
We also do a little of both – almost exactly how you described too. We automate our monthly bills but not the credit card payments. We automate my 401(k) contributions and $300 to our Roth IRA, but I personally put in the other $1400 whenever it feels right and we fund each of our ING and Smarty Pig savings goals manually every month just so I know there won’t be any overdrafts or anything after the credit card bills are paid.
You have to find that mix that works best for you. Yours does sound a lot like ours.