Ever feel like your finances are managing you instead of you managing your finances? Late fees pile up, interest charges multiply, and as soon as you find your 401(k) participation paperwork, you'll fill it out and start participating.
If you felt stressed reading that last sentence, you can understand why people choose to automate their finances. The fewer decisions you have to make in a day, the better.
Automating your finances can help put your financial life in order and free up some of your time … or it could turn into a costly experiment. The trick is to create a solid financial system — and to monitor it.
Here are five things that can derail your financial progress if you put a faulty system on auto-pilot.
1. Not focusing on cash flow
Before you set up your automatic payments, coordinate your payments and deposits. Why? If you set your payments before your paycheck is deposited, you may be looking at some overdrafts down the road — not the way to streamline a system.
Solution: First, make sure you have a cash cushion in your checking account. Second, call the companies to get all your bills due on the same day, a few days after your paycheck is deposited. Then, automate your bills.
2. Not budgeting the right amount for income
Think you get exactly the same paycheck every two weeks? You might … or you might not. Irregular income can cause a change in your financial flight plan. This is particularly true if you have an irregular income due to tips, sales commissions, or seasonal fluctuations.
Solution: If you budget for the minimum amount of income you expect to receive, you'll be in better shape. Also, make sure you set up direct deposit for your paychecks.
3. Not monitoring your finances
Automating your finances doesn't mean you can take your hands off the wheel. At least, it shouldn't mean that. You should continue to monitor your finances after you automate them to make sure you're accomplishing your financial goals.
Here are a few areas that you may feel tempted to stop monitoring:
Checking credit card statements. Before I learned more about keeping financial information secure, I didn't check my credit card statements for a few months. Life got in the way. But then I reviewed my statements and found two questionable charges, one to Bass Pro Shop. I immediately called my credit card company, and they were able to remove the charges. But I nearly missed those charges. (Plus, I didn't get anything from Bass Pro, either!)
Review your credit card's terms and conditions, too, because most credit cards have a limit on how long you have to dispute fraudulent charges after they've been incurred.It's not just your credit card purchases, though. A lot of people don't know what their credit card's annual fee is. If you don't remember that you have an annual fee, an automatic payment could overdraw your account.
Balancing your accounts. If you stop balancing or reconciling your accounts, you may miss the fact that fees are being charged to your account or the bank made a mistake. You also start to get out of touch with the health of your accounts in general. You may not realize that you're spending money you can't afford to spend.
Increasing your savings. In my opinion, one of the greatest benefits of automation is saving and investing. If you can save without thinking about it or without missing the money, you're on your way to a better life than you would have had. But if you don't ever increase your savings rate, your financial system still isn't the best it could be.
Here are some ideas to help. Can you increase your savings percentage each year? Will your accounts allow you to automate small increases in savings at a time interval that you decide? How about deciding ahead of time that all raises will automatically go to your online savings account?
Reviewing your investments. According to an interesting study by the National Bureau of Economic Research, people are more likely to invest if it's the path of least resistance. The study found that employee participation in 401(k) plans increased to nearly 100 percent when participants were automatically enrolled in the plan. (They still had the option to opt out.)
Let's say you are participating in an investment plan of some kind. Do you make it a point to increase your contributions periodically (the same techniques to increase your savings may be appropriate here) or to rebalance your portfolio? Speaking of the path of least resistance, your 401(k) plan may offer target-date funds, which rebalance for you depending on your number of years to retirement.
4. Not shopping for the best rates.
Are you a rate-shopper? (Maybe you should be.) This could include shopping for the best savings accounts rates or CD rates. But that's not all. Do you have a system in place to methodically review your insurance policies, whether or not it makes sense to refinance your mortgage, or make phone calls to reduce your monthly bills?
Solution: Set up calendar reminders — maybe once per year? — to check rates, better offers, or to call your current providers.
5. Not improving how you automate your finances.
Don't let the fact that you've automated your finances keep you from learning about new ways to automate or other methods that could improve your financial system. I am a fan of setting aside one financial day per year, but I also keep up to date during the year by reading articles and blog posts too. The ideas I get during the year focus my efforts on the most effective ways to keep my plans running smoothly. So when I do my financial planning on that one day, I know exactly what I need to research, which phone calls I should make to providers, and what I need to concentrate on when reviewing investments and goals. Discovering new apps or software can surely make your life easier down the road, so keep learning!
If you choose to automate your finances, don't forget your finances. Hopefully these five tips will help you make automating your finances a successful step toward reaching your financial goals.
What are the most effective methods of automating your finances? Do you know of any great apps? How often do you review your system and your statements?
Lisa Aberle is a college professor by day and a freelance writer by night. Always an aspiring writer with an interest in money, she once ironically misspelled “mortgage” during a spelling bee. Most of her current adventures take place on the four-acre mini-farm she shares with her husband in the rural Midwest (where she writes with gel pens whenever possible).