Financial Literacy

If you’ve ever signed up for a gym membership, streaming video service, or newspaper subscription, you’ve already experienced financial automation. Month after month, your account is automatically debited based on a decision you made once. What if you could use the same idea to save money, reduce debt, and even increase your credit score?

Financial automation uses technology to take regular financial actions on your behalf, freeing you from much of the daily grind related to money management. With automation, critical tasks like paying bills and saving for the future don't get lost in the shuffle. There’s no need to remember to pay your credit card bill, contribute to your savings account, or pay your car insurance premium. Once you set your course, it all happens automatically. 

So, what kinds of financial tasks can be automated? Examples include:

• Bill Payments - Automatic payments for recurring bills such as utilities, rent, insurance premiums, mortgages, credit cards, and other loans ensure you won’t miss a payment or incur late fees.

• Savings Transfers - Automatically transferring a set amount of money from your checking account to a savings account can help you build your savings effortlessly.

• Investment Contributions - Regular contributions to your investment accounts, such as a retirement fund or a brokerage account, can be automated to take advantage of dollar-cost averaging.

• Debt Repayment - Automating extra payments can help pay off loans faster. It may even reduce the amount of interest you’ll pay.

• Financial Reminders - With online calendars, you can schedule reminders to prompt you to review your monthly spending, check your credit reports, pay your taxes, check any cash-back reward balances, plus more.

• Notifications and Alerts - Many checking, savings, and revolving loan accounts offer the ability to set up notifications based on rules you choose. For example, you could specify that a text alert will be sent when your balance is below a certain threshold or when there’s an unusually large transaction. 

To a certain extent, financial automation is a “set and forget” strategy – but that’s not the whole picture. For example, setting aside a percentage of your income from each pay period for retirement is a great idea, but the exact percentage you may want to save will likely vary based on your salary. So the right choice today may not be best choice in five or ten years.

Further, automatic bill payment is convenient, but what if your income varies or you have a large, unexpected expense? An automatic payment that results in an overdrawn checking account isn’t anyone’s idea of effective money management. So having a solid understanding your cash flow is essential before setting up automatic payments and transfers.

This week, we’ll look at some common financial tasks that can be automated with a focus on bill payments, saving, and debt reduction. Other topics to consider exploring on your own include automated budgeting and investing tools – each of which can may prove useful, but the options are too vendor-specific to cover in a general way here.

Understanding the real benefits and limitations of financial automation places the power in your hands to decide what works best for your situation. Let’s get started!

Setting and implementing financial goals automatically can be a helpful strategy for managing your financial life. Since you make a plan in advance, your day-to-day financial behaviors will be better aligned with your actual goals, not the dozens of financial distractions we encounter every day.

But first, it’s crucial to understand your current cash flow accurately. That is, how much money is coming in each month and how much is going out. It’s like checking the depth of a pool before you dive in. Only then can you allocate your automatic payments and transfers without the risk of accidentally overdrawing your checking account.

Budget and Cash Flow Analysis

Unless you already maintain a monthly budget, one of the risks of automation is underestimating your actual spending – thus overestimating how much you can dedicate to automatic payments.

If you don’t already maintain a budget, this website offers a budgeting course and tools to set up a monthly budget and track your monthly spending.

Another approach is downloading your checking and credit card account transactions for the past few months. For each month:

• Export your transactions to a spreadsheet.
• Sort the transactions by name. For checks, consult your checkbook register or account statement to identify each check and update the name to reflect the payee.
• Cut the deposits from the list and paste them into a new sheet.
• Cut the fixed expense payments and paste them into a new sheet. Examples include loan payments, rent, mortgage, and insurance payments that are the same every month.
• Review the remaining transactions for required expenses that vary, such as utility bills, gas, and groceries. Paste them into a new sheet.
• Use the auto-sum tool to total the amount column for each sheet.

You’ll then have a rough idea of your income, essential fixed expenses, essential variable expenses, and nonessential discretionary spending. Remember, spending (and even income for some) can vary monthly – unexpected bills, vacations, and holiday gifts can be unpredictable. So, tracking your spending over time is important to understand your cash flow best.

Increasing Cash Flow

For those new to monthly budgeting, aligning your spending with your goals is key to reaching your financial goals. By cutting unnecessary spending, more money can be freed up for savings, paying down debt, or any other financial goal.

Suppose you used the spreadsheet method outlined above. In that case, the nonessential discretionary spending list is an excellent place to search for ways to save. Cutting back on convenience eating, dinners out, and unplanned shopping is a great place to start. Moving on to your other spending categories, you may find that some expenses – like cable TV and subscriptions – aren’t being used and could be canceled (or paused) to free up cash. For example, if you have multiple streaming services, you can pause the ones you use the least and rotate through them every few months – potentially saving hundreds of dollars per year without giving everything up.

And for expenses you need to keep, it may be possible to save by comparison shopping or changing service providers. Cable television bills often start at a low promotional rate and then increase, sometimes dramatically, over the years. Sometimes, even calling your cable company and telling them you’re considering a change will reduce your bill. You can also comparison shop for services like auto insurance and explore “similar but less expensive” options for just about anything you buy.

Finally, suppose you review your spending and find fees for late payments, overdrawn accounts, or even out-of-network ATM usage. In that case, it’s crucial to understand why you were charged the fees and investigate how to avoid similar fees going forward.

The Linked Savings Strategy

Even with a solid understanding of your cash flow, it’s possible to be caught off guard by higher-than-normal spending. Consider linking your checking and savings accounts to minimize fees associated with overdrawing your checking account. That way, if you spend more than expected, money will be automatically transferred from savings to cover the difference.

To use this approach, contact your bank or credit union. And remember, linked savings is just a backup plan. Be sure to understand any fees and limits on the number of transfers per month.

The Takeaway

Setting up automatic payments without understanding and actively managing your monthly budget can be risky. So, if you don’t already budget your money, consider setting up a budget and tracking your spending for at least a couple of months before taking steps to automate your financial life.

Once you are confident with predicting your monthly cash flow, you can continue to explore options for automating your way to your financial goals. 

Automated bill payment can help you manage regular expenses efficiently, ensuring bills like utilities, mortgages, and credit cards are paid on time. Consistent, timely payments also work to improve low to moderate credit scores – not to mention avoiding late fees.

Setting up automatic payments can even lower some bills. For example, many student loan providers offer an interest rate reduction when payments are made automatically via bank draft.

Bills that are often good candidates for automatic payment include:

• Utilities such as electricity, water, heating oil, and gas.
• Rent or mortgage payments.
• Credit card bills.
• Loan repayments.
• Insurance premiums.
• Subscription services, including streaming platforms, magazines, and software.
• Membership fees for gyms and other clubs.

However, automating the payment of every bill may not make sense for everyone. Variations in bill amounts and due dates have the potential to create complications – especially for those with variable income, who are paid bi-weekly, and those struggling financially. There are strategies for dealing with some automatic payment issues. Still, it's essential to be confident that automatic payments will not result in an overdraft before setting them up.

Managing Bills That Vary

Most monthly bills are more or less consistent – there may be slight variations, but they're always in the same ballpark. But for other bills, especially credit card and utility bills with significant seasonal variation, there are strategies to consider that offer many of the benefits of full payment with less risk of an unplanned overdraft.

Credit Card Bills

For many of us, credit card bills can be highly variable. Unexpected bills, holiday shopping, and vacations can all cause the balance to grow higher than the average month. And even for those who typically spend using a debit card, a significant expense – like a car repair – could result in a credit card balance going from zero to thousands of dollars overnight.

One solution to this situation is to set up automatic minimum payments for your credit card account. While the entire bill isn't paid, the minimum payment is typically no more than a few percent of the outstanding balance or $25 to $35, thus lowering the risk of an accidental overdraft. But making the minimum payment accomplishes two important things – it avoids a late payment fee, and it prevents the damage a late payment may cause to your credit score.

Remembering to pay as much as possible to your account balance each month is essential. Otherwise, the balance can continue to grow until it's more challenging to manage. Setting up a monthly "check my balance" alert using an online calendar or your credit card company's customized alert system is a great way to get a periodic prompt to review your account.

Utility Bills

Before setting up automatic payments for utility bills, it's crucial to understand how they vary over a year. For example, those with bitterly cold winters may find their gas or electric bills increasing exponentially in winter.

Suppose it isn't possible to keep a cushion of extra money in your checking account to cover higher bills. In that case, some utility companies offer a budget billing or level payment plan, which averages your yearly usage into equal monthly payments. This option can make your utility bills a fixed expense, much easier to handle with automatic payments.  

Dealing With Due Dates

An often overlooked factor when automating bill payment is the due date of each bill – and how that compares to the date your paycheck arrives in your account. For example, if a bill payment is scheduled for the end of your pay period, the chance of an accidental overdraft increases.

To streamline payment schedules, the solution is to arrange for all your bills to be due around the same time, preferably soon after payday. When setting up automatic payments through the vendor's website or your bank or credit union's bill pay center, schedule the payment dates to align with your pay periods. If you are paid bi-weekly, arrange some payments to be withdrawn after the first period and others to be withdrawn after the second. Otherwise, schedule payments a few days after you're paid each month.

It’s all too easy to let life’s expenses consume entire paychecks. Loan payments, day-to-day spending, mortgage or rent payments, and other costs can sometimes distract us from contributing toward longer-term financial goals. Some may want to save an emergency fund to avoid credit card debt for an unexpected bill. Others may wish to contribute consistently to a retirement or brokerage account to build wealth for the future. Either way, automating your savings plan can pay dividends.

Rather than wait for a windfall or tax refund to kickstart a savings plan, one option is to use payroll deductions or automatic checking to savings transfers to get started. Even small amounts consistently saved can make a real difference over months, years, and even decades.

This hands-off approach is the cornerstone of the “pay yourself first” philosophy. Automatically redirecting income towards savings flips the script on how many people think about saving for the future – rather than waiting to have “extra” money to save, daily spending adjusts to after-savings income.

Starting Small? No Problem

Making ends meet on less money may seem challenging (and for those experiencing financial hardships, it indeed may). However, saving amounts that may seem trivial can grow substantially over a longer time horizon. For example, those hoping to save an emergency fund may find they can get by while saving $25 per week. But over a year, that adds up to $1,300 – a substantial cushion against unplanned expenses and potential credit card debt.

For those saving for retirement, investing just $10 a day starting at age 25 may grow to over $1 million by age 65, assuming an 8% average annual return. Even $3 a day amounts to nearly $350,000 using the same assumptions.

The benefit of automatic savings is that you can start with an amount manageable for you now, increasing over time. Like the saying about the best time to plant a tree (“20 years ago”), there’s no substitute for the power of time to grow money through continual contributions and compound interest.

How to Get Started

The tools will vary based on your employer and financial services provider. Still, the concept is the same – rather than keeping all of your money in a checking account and allocating different amounts to savings when you happen to think about it, the money is automatically redirected immediately.

If supported by your employer, one approach is to use payroll deductions to allocate your income to different accounts. For example, 80% of income may be routed to your checking account, 10% to an emergency savings fund account, and 10% to a retirement account. Of course, the exact percentages will vary based on your income, expenses, and other considerations unique to your situation.

For those who are self-employed or work for employers who don’t support payroll transfers, a typical checking account can be set up to accomplish a similar result. They can set up monthly checking to savings transfers to build an emergency fund. For retirement savings, a brokerage account can be set up to schedule withdrawals monthly on a pre-determined date.

The Takeaway

Like setting up automated bill payments, automatic savings requires understanding your monthly cash flow to avoid potential overdrafts. But one advantage of automatic savings is that you can start with any amount that’s comfortable for you. The important part is to get started and then reevaluate your savings target over time.

An extra house payment here or student loan payment there - savvy moves could shorten your debt repayment timeline by years and save thousands in interest. But, for many, finding room in their budgets for those additional payments can be a challenge.
 
When reducing debt, seemingly minor changes can have an outsized impact on your finances. Strategic use of automated payments can generate extra "found money" each month to turbocharge debt repayment that requires little additional effort or sacrifice. And while you are indeed paying more than the required minimum, the difference may be slight compared to the potential benefits - especially for loans with more extended repayment terms.
 
But what about higher-interest debts like credit cards, personal loans, or home equity credit lines? This is where prioritizing payments comes into play. In this case, it's not just about paying more but about paying smart. By prioritizing payments, you're employing a powerful tactic to reduce your overall interest burden by focusing increased payments on the most costly debt first. 
 
Installment Loans: The Extra Payments Strategy
 
Installment loans are repaid on a fixed timeline with a fixed number of payments. With these loans, the bulk of early payments go towards interest. One strategy to accelerate repayment and reduce interest charges is to pay slightly more than is required each month.
 
With a home mortgage, for example, switching to bi-weekly payments instead of one monthly payment means you'll actually make 13 months' worth of payments per year. But the month-to-month difference to your cash flow is subtle compared to making a full extra payment all at once. On a 30-year $350,000 mortgage at 7% interest, bi-weekly payments pay off the mortgage seven years faster and save over $110,000 in interest. And even if you plan to eventually move to a new home, more than $31,000 of the savings is in the first ten years alone.
 
Those with student loan debt can also benefit from seemingly small changes that can be implemented automatically. For example, for a $30,000 federal student loan with a 4.5% interest rate repaid over a ten-year term, the monthly payment would be $310. By rounding that payment up to the nearest $50 increment, the payment would be $350 per month – just $39 more than the required payment (totaling a little more than one extra payment per year). The monthly difference may not seem like much, but it pays off the loan two years faster and saves over $1,000 in interest.

With both examples, the key is that the extra payments directly reduce the monthly principal balance, so more of your future payments go to principal rather than interest. This cascading effect allows you to pay off loans years ahead of schedule by consistently paying just a little bit more each month. To use this approach, contact your lender to change your payments and to ensure that extra payment amounts are directed toward principal reduction.

The Prioritizing Payments Strategy

When dealing with multiple debts of varying interest rates, prioritizing payments can profoundly impact the total interest paid over time and the time it takes to become debt-free. By structuring your automatic payments to tackle high-interest debts first, you can reduce the overall cost of all your debt.

This approach is often referred to as the "debt avalanche" method. For example, suppose you have $600 per month to apply to reducing debt. If you have a $3,000 balance on a credit card that charges 18% and a $5,000 balance on another card that charges 15%, you would set the automatic payment on the 15% card to the minimum payment (around $100) and set the automatic payment on the 18% card to $500. Once the 18% card is paid off, you then change the automatic payment on the 15% card to $600.

Prioritizing debt repayment with the debt avalanche strategy works best for simple interest loans (like credit cards, personal loans, and perhaps auto and student loans) with higher interest rates. With lower-interest loans, the effect is less dramatic. And there's also the issue of prioritizing debt reduction versus saving for retirement or other goals. In other words, is allocating extra money to reduce interest costs with accelerated repayment worth forgoing potential long-term investment gains? 

The Takeaway

Like any time you set up automatic payments, monitoring your spending is crucial to ensure that there's enough in your account to make the scheduled payments. But automatic payments can be an important part of a well-considered, strategic approach to managing any debt.

Vigilantly monitoring cash flow and account balances ranks up there with watching grass grow on most people’s excitement meter. But without oversight, there’s an increased risk of overdrawing accounts, especially when you schedule payments and transfers in advance.

Thankfully, today’s financial accounts include alert and notification options for an extra layer of automated monitoring. These notifications and alerts can help to identify potential issues automatically so you can take action if needed.

And while there’s no substitute for your oversight of your accounts, it can be easy to forget to check in as often as you may like. Online calendars are ideal for setting up pre-determined check-in dates and times, proactively notifying you that it’s time to check your progress. These “money dates” can be set up to appear at specific intervals (like monthly or annually) or at particular dates you select in advance.

When used together, alerts, notifications, and calendar events work to ensure that you always have a clear understanding of your accounts. Then, you can take any action that may be needed, such as updating your savings or debt reduction transfers based on your changing circumstances.

Account Alerts and Notifications

While the exact notifications and alerts available will vary based on the account type and financial services provider, they often share similarities. Most also allow you to receive alert notifications via text or email so you can choose the option that works best for you.

Common alerts and reminders helpful in automating your financial life may include:

• Bill and Payment Alerts - Notifications for payment due dates and payment completions.

• Low Balance Alerts - Get a notification when your account balance drops below your pre-defined threshold.

• Transfer Alerts - Notifications when money is moved from one account to another. For example, when money is moved from your checking to your savings account.

• Withdrawal Alerts - Set a threshold for notification when a transaction exceeds a certain amount.

• Statement Alerts - Notifications when a checking, savings, or credit card statement is available for review.

• Deposit Alerts - Notifications when money is deposited into your checking or savings account.

• Security Alerts - Notifications of password changes, new device logins, and other related alerts help to keep your accounts secure.

 While initially setting up alerts takes a little time, you only need to do it once for each account. Over time, you may find that some notifications are more valuable than others – and you can easily modify them as required by logging in to the account.

Calendar Events

While much of your financial life can be automated, regular oversight is essential to verify that your automation strategy aligns with your changing income, goals, and priorities. A few examples of “money dates” you can add to an online calendar include:

• Financial Reviews - Monthly, quarterly, and annual financial reviews to reassess your budget, review your financial goals, and adjust your savings and investment strategies.

• Tax Deadlines - Reminders for tax-related deadlines, including quarterly estimated tax payments for freelancers, tax return filing dates, and IRA contribution deadlines.

• Credit Report Checks - The federally mandated AnnualCreditReport.com allows you to check each of your three credit reports once per year. An annual reminder for each report (spread a few months apart) offers more insight than checking all at once.

• Insurance Renewals - Get annual reminders for when your insurance policies are up for renewal so you can shop around for a better rate or adjust coverage as needed.

• Annual Subscriptions and Memberships - Use to evaluate whether you want to continue or cancel yearly subscriptions or memberships before they auto-renew.

The Takeaway

In the same way that payments, transfers, and other financial tasks can be automated, account alerts, notifications, and calendar reminders can be set up to ensure that you’re always informed and in charge.

In exploring personal finance automation, we’ve learned that handling many financial tasks with little day-to-day oversight can be relatively easy to set up and manage. Yet no amount of automation can take your role in making sure your plan continues to work for you.

Automation is great for scheduling transfers and bill payments using rules you set in advance, but your plan should be continuously updated based on changes in your financial outlook and goals. Only you, for example, can determine the balance between reducing debt and saving for the future when your income increases.

And while it’s easy to set up automated transfers to assist with saving and debt reduction priorities, there is still a crucial question - what exactly are your financial goals? Changes in your life situation can also bring changes to your automation plan. For example, consider someone who is currently renting and decides to work towards home ownership. In that case, it may make sense for them to reduce transfers to retirement savings and redirect the money to a savings account for a down payment. That’s just one of countless examples that could include anything related to financial planning - from investment allocation to starting a business.

Checking Your Progress

The key to successfully leveraging financial automation is finding the right balance between technology and personal involvement. Regularly reviewing financial statements is essential to stay on top of your finances and catch any discrepancies that automation might overlook.

Alerts and calendar reminders bridge the efficiency of automation and the necessity of personal oversight. They’re the nudge we need to reassess our financial health periodically. Consider revising your plan at predefined intervals. Examples may include:

• Monthly Check-ins - Review account statements, credit card bills, and automated transactions. Are the bills being paid on time? Are the savings transfers aligning with your budget? This routine can quickly catch any issues before they become a problem.

• Quarterly Reviews - Review budget, debt reduction, and savings goals. Is your monthly budget on track, or are adjustments needed? Are you making progress toward any debt reduction or savings goals? Should any of your transfers be adjusted?

• Annual Deep Dive - Reassess your financial goals, review your credit reports, and ensure that you’re maximizing any employer benefits. This annual review ensures that you’re not just on autopilot but are heading in the right direction.

During each review, it can be helpful to ask yourself if changes to your financial life are reflected in your plan. Everyone’s financial situation is subject to change, so any automated transactions need to reflect current circumstances - not the circumstances of a year or two ago. 

The Takeaway

When it comes to personal finance, setting up an automation plan is the first step. Regular reviews work to ensure that your financial autopilot is always aligned with your current situation and changing goals. 

And remember, if you’re unsure about your goals or whether you’re on track for a secure future, reach out to a qualified financial advisor for personalized guidance.