On June 29th, The New York Times posted a blog article entitled, "How Much of Your Finances Should You Automate?" presenting two opposing views: Ramit Sethi of I Will Teach You To Be Rich advocates automating everything, while Adam Baker of Man Vs. Debt favors total "unautomation."
I believe there is a very important middle ground. Automating some of your finances can be incredibly convenient and is a great way to save time, but automating everything makes it too easy to go on autopilot and forget to pay attention to your personal finances.
Many factors come into play in the "To Automate or Not to Automate" debate, and ultimately the most important things to consider are:
- Your own financial situation (Are you barely able to make your payments every month? Or are you always able to pay every bill without worry?)
- Your money personality (Do you like to meticulously read your bills? Or do you avoid thinking about your money at all costs?)
- Your monthly financial habits (Do you have calendar reminders in place so you never miss a bill? Or do you accidentally send in that check a couple of days late?)
If you're in a financially stable position and can comfortably pay your bills each month, automating some of your payments can be a great way to go. However, if you're not sure you'll have enough money in your account to cover your bills, don't automate just yet.
At LearnVest, we advise our users to automate their finances in the following ways:
1) Transfers Into Your Savings Account
I always encourage people to pay themselves first, so I really advocate setting up direct deposit for your paycheck and establishing an automatic transfer so that part of each paycheck goes straight into your savings account. I can't stress how important it is to constantly build your savings, and automating this is a great way to do so. (You'll never miss the money too if it leaves your account as soon as your paycheck hits!) If you can save a little extra in a given month, that's excellent and you can always make additional transfers manually. However, an automatic transfer makes saving easy because you won't feel like you are sacrificing anything if that part of your paycheck never comes into your checking account to begin with. LearnVest recommends saving 15% of your income. (Or at least trying!)
2) Bills for Fixed Expenses
There is no denying that auto bill pay is easier and more convenient than keeping track of and remembering to pay all of your bills each month, so it makes sense to use it for fixed expenses that you have approved and that you're 100% comfortable with. These expenses, like your rent, insurance, gym membership, and cable are most often the same every month and should be built into your budget. You'll know to expect these payments each month and don't need to review them because they don't vary. BUT REMEMBER: If you use auto bill pay, you must always make sure that you have enough money in your checking account ahead of time so that you don't overdraw!
1) Bills for Variable Expenses
While auto bill pay is great for fixed expenses, avoid it for variable expenses. Your utilities bill and cell phone bill, for example, vary based on your usage, so it's important to check your bill every month so you can track how much you're really spending. I absolutely don't advise auto paying your credit card bill either because you should always check all of the charges on your statement and look out for inaccurate charges. It's much easier to catch these mistakes before you pay your bill, rather than trying to get a refund once they already have your money!
Instead of using auto bill pay for variable expenses, set up automatic calendar reminders to review and pay these bills. I recommend you have these for 5 days before the bill is due!
2) If You Have To Pay A Convenience Fee
Never use auto pay if you'll have to pay a convenience fee to do so. A small fee may not seem like a big deal, but these fees add up over time and paying bills is generally so quick and easy, especially when you do it online, that it really isn't worth paying a fee just to save a few minutes.
Regardless of whether you use auto bill pay for a certain bill, I recommend paying all of your bills online if you can. Online payments are quick and easy, and you don't have to deal with writing and mailing checks. Check out LearnVest's "I Want to Pay My Bills Online" checklist if you need help setting up online bill pay.
Most importantly, remember to think of auto bill pay as a convenient tool to help you manage your finances and save you from missed and late payments, which can incur penalty fees and hurt your credit score. You should never -- I repeat, NEVER -- use automation as an excuse to not pay attention to your finances. Even if your bills are paid automatically, you should still be aware of the money flowing in and out of your accounts.