How to Automate Your Personal Finances

For the past few months, I've been moving toward a system of paperless personal finance. In this guest post from Paul Lussier, he explains his own automated system.

Lately J.D. has been talking a lot about automating his finances.  In my world (that of high-tech, software, and large computer systems), we strive to automate as much as possible. By doing this, we hope to minimize error by reducing human interaction, leveraging the power of the computer for what it's good at, leveraging the power of people for what we're good at.

In other words, we emphasize the strengths of both the computer and the human. Computers are really good at doing the tedious, mind-numbing, soul-sucking repetitive tasks which humans hate. Humans are far better at reasoning, logic, and creative thinking than computers.

I've applied this understanding to put my finances on auto-pilot. I use the automated computer systems at my bank to move money around between different accounts, pay bills, earn interest, credit-card points, etc.  Though the following system may seem complex, it's really fairly simple once it's set up. (This method also works nicely with the recent post about building wealth with a “virtual employer”.) Here's how my system works:

Consolidate your bank accounts
I've consolidated all my accounts at USAA Federal Savings Bank. Their online banking site and customer service are unparalleled. Choose a bank with which you are comfortable, and which does not charge outrageous fees or otherwise “nickel & dime” you to death.

If you use credit cards, get a credit card with this bank and stop using the others.  If your bank and credit card are with the same institution, you can easily set up automated payments from your checking/savings accounts to your credit card to occur on the due date. This will virtually eliminate all late fees! Consolidating bank accounts makes life simpler.

Set up overdraft protection
Some banks allow this — others don't.  My bank does. Using your savings account to protect your checking account does mean that you may lose some interest on your savings.  But it's better than having to pay back the overdraft amount plus interest, plus a possible late/finance charge on top of that. In some cases you can set up a credit card to be the overdraft protection, but this just feels wrong to me.

Set up accounts specifically for bills
This means you actually have two checking and two savings accounts. One pair is for Daily Use — this checking account is the one from which you buy gas, groceries, take out cash at the ATM, etc. This primary savings account is where you stick “extra money” (more on that later).

The Bills accounts are where you start budgeting.  I struck on this idea when we had some major financial re-organization a year or so ago.  I opened a new savings account online. The process took five minutes. I calculated what our bills cost, and then set up an automatic transfer from my Daily Use checking account to the Bills savings account to occur on the dates when I get paid.  Now I'm budgeting this way for all my bills that occur less than monthly, and I'm earning ~4-5% interest on the money as well!

Sign up for direct deposit
Have your check directly deposited to your Daily Use checking account. In most cases, that money is available one business day before payday.  Compare that with the hassle of having to go to the bank, deposit the check, and have it clear.  That whole process, if you're lucky, takes two days, which means it takes three days longer than with direct deposit.  Think of the amount of interest you're losing and the amount of time required to go to the bank!

Pay yourself first
For many people, paying yourself first is the starting step.  But with this system, you need to set up the infrastructure to handle paying yourself first. Set up an automatic transfer from your Daily Use checking account to your Daily Use savings account on each day you get paid.  It doesn't need to be big: $10/week, $100/month, $50/paycheck — whatever you think you can afford. Remember, if you need this money, it's just a transfer away.  But the key is to make it more painful to get at.

Pay your bills second — automatically
Now that you've set up the infrastructure, determine which bills you want to budget for.  Set up an automatic transfer for that amount from your Daily Use checking account to your Bills savings account on the day you get paid. (You're moving the money to savings because it will earn a higher interest rate than in a checking account.) Consider putting it in a certificate of deposit which may earn a higher interest rate.

I pay my bills with debit and credit cards, and sometimes with my bank's automated bill-payment system. (Different vendors have different requirements.) Again, this allows me to consolidate things. Looking at my credit card statement, I can see most of my bills in one place.  Also, I don't have to worry about variable payments.  For example, my cell phone bill fluctuates from month-to-month based on usage, text messages, etc.  This makes it difficult to set up an automated payment from my bank.  Charging the bill to my credit card solves this problem.

If you have a Bills checking account, you can use the associated debit card to pay bills, too.  I use the credit card, since my rewards credit card provides me twice the return compared to the rewards debit card. Using the credit card also provides me with some amount of protection in the case of identity theft.

Schedule recurring transfers
Now that all your accounts are in place, it's simply a matter of setting up transfers for the correct times and amounts from your Bills savings account to your Bills checking account. Though this may sound complicated, it's not.

It's true that the process of transferring between all these accounts works best when the bills are large and infrequent.  For example, I have a variety of insurance bills, none of which occur more often than quarterly.  By totaling all these different bills, I'm able to use this system to not only budget these expenses, but also earmark certain monies specifically for them all while earning interest on them.

For regularly occurring monthly expenses (like electric, cable, cell phone, etc.), I have the biller charge my credit card.  This makes sure the payment is never late and earns me a bonus reward.  The credit card bill itself usually gets paid directly out my normal checking account because that's where the money happens to be.

Another thing I like about the separate checking/savings account set up is that if there are billers who need to draft a checking/savings account, I can completely isolate what they have access to.  I can also make sure that the money is sitting in savings until the last possible moment but gets automatically transferred over in time to pay the bill without incurring a late fee.

Putting the system into practice
This is my first year using this set up.  So far I like it. As I continue to refine and tweak it, however, I'm finding a few rough edges.  For example, I can schedule an automatic bill pay for an indefinite amount of time in the future, but I cannot schedule a transfer between savings and checking to occur on a date greater than one year from today's date.

Also, the scheduling of automated transfers is not as granular as with the automated bill pay system.  I can set up transfers to occur weekly, 1st and 15th of the month, every two weeks, every month, or every two months.  I'd really like to be able to set up a transfer for the 15th and last day of the month (when I get paid) and I'd really like to set up transfers every three months (quarterly) on a given date.

I hope you find this system useful as I have!

Thanks, Paul. I, too, continue to refine my paperless personal finance system. It's a matter of discovering which accounts work best with which companies. Sometime later in 2008, I'll describe my current setup.

Final note: Paul sent me an e-mail the other day. “Ironically,” he said, “I just finished The Automatic Millionaire. It was great read. I was amused to read so much of what I already do on my own. Most of what I do here is covered in much greater detail in that book.”

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Ryan S.
Ryan S.
12 years ago

I don’t have an account that’s really for bills specifically, but I do have one that’s for yearly fixed expenses, like auto insurance, life insurance, vehicle registration, IRA contribution, and the like. It’s a high yielding money market with check writing. It’s worked out pretty darned well over the year or so I’ve had it.

Ryan
http://uncommon-cents.net/

Frugal Bachelor
Frugal Bachelor
12 years ago

I’m all for automating finances and do it as much as possible, however, sometimes it seems like the need to automate may be a sign of a more fundamental problem: overly complex finances. Examples: you will never have late fees (or even a bill to pay) if you use cash or a debit card instead of a credit card. Even if you do use credit cards, the fewer you use the less likely you are to get mixed up with the due dates. The fewer transactions you have the less likely you are to overdraft. The fewer monthly bills you… Read more »

Cinnamon J. Scudworth
Cinnamon J. Scudworth
12 years ago

I agree with Frugal Bachelor, although I recognize that, for some people, setting up a structure like this is as much to control their own bad habits as it is to “simplify.” I similarly set up automatic payments for bills and other fixed expenses, but I do it all with 2 accounts: 1. A checking account where my paychecks are direct-deposited and where all of my bills and expenses come out of. 2. A high-yield savings account where, at the end of the month, I move any net surplus of monthly income minus monthly expenses. As long as you are… Read more »

J.D.
J.D.
12 years ago

I understand how this system can seem overly complicated, and I know the value of simplicity. I can’t speak for Paul, but I know for myself, that the extra accounts don’t add much complexity, but they make it easier for me to compartmentalize things in my mind. I have three savings accounts and two checking accounts. My main savings account is for my emergency fund. It’s a high-yield online account. My other two savings accounts are at my credit union, and they serve specialized purposes. The money I put in them is designated for very specific uses. One of my… Read more »

J.D.
J.D.
12 years ago

Oh yeah — I pay my bills automatically from the various accounts. Works like a charm.

RacerX
RacerX
12 years ago

Maybe it is that I am being dragged kicking and screaming into the 21st century, but I won’t do automatic bill pay.

I work with Microsoft Money everyday and pay my bills electronically if possible, even that is pretty new for me.

I am not a techo-phobe at all, but for the same reason I resisted Direct Deposit for a long time; I never want my money to feel not-real. each number is a real dollar, not a video-game score, and (maybe it is just me) it is easier to spend intangible points vs real dollars!

Kelly
Kelly
12 years ago

JD, I use just one checking and savings also, but I keep a small spreadsheet of the savings account broken into subcategories for Emergency Fund, vacation, Christmas, etc. I also keep quarterly and annual bills listed in there along with the month they come due, and then I simply transfer the amount needed over to my checking when its time to pay them. This has been a big help to my budgeting, as I always had “surprises” coming up with bills I wasn’t expecting. Now I know when everything is coming up and I make sure to “fund” it beforehand.… Read more »

David C
David C
12 years ago

Consolidating to a single bank is not the wisest idea at the moment. There is enough risk in the banking sector to warrant some thoughtful diversification by spreading savings across several institutions.

JerichoHill
JerichoHill
12 years ago

David,

Deposits at FDIC insured banks are covered for up to 100,000 per account. If you have that much in savings/checking, then yes, one should be diversified. However, for folks who rather have accounts in the thousands, diversification of bank accounts is not necessary. Despite macroeconomic troubles, we’re not looking at 1929.

Russell Heimlich
Russell Heimlich
12 years ago

I agree with Paul, USAA Federal Savings rocks! Their website is easy to use compared to others I have seen plus they offer free ATM withdrawls.

This is the year I will automate sending money into my Roth IRA. Usually I just max it out in one large lump sum payment at the end of the year. Great post, I like the way Paul thinks.

Sandy
Sandy
12 years ago

I’m a big fan of USAA too; all my bills are consolidated w/them. Like Kelly, I work from a simple spreadsheet too, (couldn’t have explained it better if I tried), and so I have one checking account & one high-yield savings account with them because of the spreadsheet. Everything is automated and comes out of my checking account, except for the monthly food bill and gas for my car, and then I keep about $100 as a cushion. So it’s all budgeted. And this is the fun part for me, and I know it’s purely psychological, but I like to… Read more »

Lazy Man and Money
Lazy Man and Money
12 years ago

USAA is great, but I thought only military personal can apply. I save 5% with many of many credit cards – that’s worth quite a bit of inconvenience for me.

I have not seen anything that can “pull” the amount from these credit card institutions and schedule a payment for it. If anyone can get this to work, they’ve solved a major financial issue of mine.

mercurial scribe
mercurial scribe
12 years ago

Love this! I just started doing this not to long ago (the two checking account system in particular) and love the change it’s made for me… surprisingly less stress and bills get paid on time.

Great post!

corp-mule
corp-mule
12 years ago

I’ve been doing this (or something very similar) for years. It’s not complicated. It’s easy. I have two checking and savings accounts at one credit union. My paycheck is deposited directly into my “daily checking account”. I have set up scheduled transfers to move a certain amount into savings and another amount into my “bills checking account” every pay interval. I recently replaced my (low interest earning) savings account with (a better interest earning) account at EmigrantDirect. Leaving about $1,000.00 in the old “daily savings account” in case of an emergency. I can transfer this money to my checking real… Read more »

filip
filip
12 years ago

This is generally good advice however i direct debit all my bills from my credit card which i put money onto – before – its spent (essentially using it as a standard checking account only with protection). Here’s my Layout: Bank 1. Cheque – All Incoming – Auto Outgoing Savings – Bank transfer outgoing (rent) Long term Savings – Savings Goals Credit – All automatic bills (1K limit only) Bank 2 Cheque – Weekly cash expenses Savings – Intermittant cash expenses Credit – emergency (1K limit only) Note: I only carry around with me the 2 cards of Bank 2… Read more »

Jen
Jen
12 years ago

I love having my bills automated, though I recently ran into a snag. In reviewing our car loan with Chase.com, I realized at the beginning of the month that we only had 2 payments left to go. My husband had gotten a bonus at the end of December, so I paid the 2 car payments and celebrated having a car that’s bought and paid for! Chase.com promptly removed the car loan from my husband’s online profile, but still managed to pull the automated payment from our Checking Account on the 11th. According to Chase, we should have known to stop… Read more »

Getting To Enough
Getting To Enough
12 years ago

Like the author, Paul, and JD, I too like to compartmentalize my savings accounts. I also like the idea of having a Bills account separate from a Daily Use account. Otherwise, I find that when big, nonregular bills come due (like insurance, etc.) I need to “borrow” from my “real” savings account, so I’m not really saving that money after all. One change I’d make to Paul’s process is to eliminate the Bills savings account and just go directly into the Bills checking account. It seems to add a lot of extra complexity and work to earn a little extra… Read more »

Cordelya
Cordelya
12 years ago

My husband and I have a USAA joint checking account, in addition to our separate individual checking accounts (our personal bills are just that – our personal bills). We use the joint account to pay for things we both pay for, like the mortgage and utility bills. I have a direct deposit allotment from my paycheck put in there every month, separate from the rest of my check. My husband, who is paid weekly, transfers a portion of his check into the joint account each week. I am the official bill-payer around here, so I hande all of the outflow… Read more »

Ian
Ian
12 years ago

It’s funny, I’ve been using a system very similar to this for the past 6 years. It has worked out wonderfully for my partner and I. We never have to worry about paying our bills because the money is automatically transferred to our bills account each paycheck, and the bills are setup for autopay. Having the “Daily Use” checking account is also great because it keeps you on budget. We transfer money to the “Daily Use” account once a week. That is the money we have for groceries, dining out, entertainment, etc. Seeing only your budgeted amount in the account… Read more »

corp-mule
corp-mule
12 years ago

Another benifit to the “daily expenses” and “bills account” is that, I use the daily expenses account for online purchases.

Because this account balance is usually kept low, if someone were to obtain the account info, they wouldn’t get much and, I only put a minimum amount at risk.

My Super-Charged Life
My Super-Charged Life
12 years ago

It is also possible to automate your budgeting. I have used an online system called Mvelopes. As you might deduce from the name, this is an online version of the popular envelope budgeting system. Mvelopes will automatically download your new transactions from your bank allowing you to then assign them to the proper envelope. It is a great system and saves tons of time when you are trying to track every penny that you spend.

Anne
Anne
12 years ago

Don’t FDIC regulations limit withdrawals from a savings account to 6/month? This would make bill pay from a savings account impractical, unless you have just a handful of bills–in which case the interest earnings probably don’t amount to much.

jmacdaddio
jmacdaddio
12 years ago

I put most of my transactions over $5 on my credit cards. I have two cards, an Amex and a MC, and I stagger their use with the billing cycle close dates so as to delay the payment as long as possible. The advantage I have is that I can predict and model my cash flow several weeks in advance and see how much I can put aside for savings. This is proving especially useful since I am in the final stages of saving for a condo. I have three accounts with ING: one checking and two savings (long term… Read more »

jason
jason
12 years ago

I have just setup an ing direct account it does allow transfers on the 15th and 1st of the month in addition to the normal weekly, bi-weekly and monthly.

Erin
Erin
12 years ago

Another suggestion for automating finances is to use a personal finance site like Yodlee, which I just started using. All my accounts, bills, and due dates are in front of me, and it truly makes automating finances a no-brainer. We have ING savings and interest checking, and a checking account at PNC (our local bank) for infrequent check writing and check deposits (both of which are inconvenient to do through ING). Bills (including a scheduled transfer to savings) are auto-debited from our ING account, and at the end of the month we roll over any extra income into savings. Easy!

Aleks
Aleks
12 years ago

I have a similar system to jmacdaddio, except that I only have one credit card. I have all of my regular bills set to auto-charge to my Visa, and any annual or irregular bills get put on there too. I use a spreadsheet to track my Visa bill throughout the month. I don’t have my Visa set to auto bill pay because I like to maintain control of when the bill is paid. I get paid bi-weekly, plus if there’s a large expense and I need to take money out of savings I want to make sure that the money… Read more »

Tim
Tim
12 years ago

I read a great deal about automating your personal finances, and it is rather disturbing because most people do not caveat it with continuing to actively monitor your personal finances. credit card companies and other creditors do change due dates. investments like cd’s have maturity dates. although you have automated your bill payments, you still need to ensure that the bills got paid or deposits were credited or investment instructions were executed.

i’m all for automation, but you still cannot replace your active participation in the automation process.

viewfrom13
viewfrom13
12 years ago

I use a system very similar to the author’s, with two banks: USAA and Capital One. Both of these banks are great to work with online, and can be downloaded directly into Quicken. Once the data is in Quicken, it’s relatively easy to track your spending using categories and quickly run reports to compare against your budget. It’s true, as one person pointed out above, that you can only withdraw from a savings account 6 times in a calendar month. So, I have 3 savings accounts for short, medium, and long-term savings. This makes it very easy to salt away… Read more »

Dividends4Life
Dividends4Life
12 years ago

My life has become so busy that if everything were not automated, something would fall between the cracks. The things that cause me the most grief are those that are not fully automated – e.g. income taxes.

Best Wishes,
D4L

Roscoe
Roscoe
12 years ago

One poster said, rather triumphantly, that she and her husband have separate accounts for everything. How long do you think that marriage will last?

Paul
Paul
12 years ago

Hi all, I’m amazed at all the comments! Thanks a lot! To answer a few questions: – The second set of accounts, as J.D. pointed out, buys me compartmentalization. The Bills checking account has the Bills savings account as the overdraft protection account, neither of these is linked to any other account. In the case of an identity fraud issue, I can immediately stop all future transfers and they can’t get to other money. – The advantage of the Bills checking is also that it comes with a separate debit card linked to it, so it provides some extra flexibility… Read more »

Andrew
Andrew
12 years ago

If you open a Vanguard money market along with an IRA there is an option to maximize your scheduled contributions from your MM to your IRA automatically. I thought it was another interesting way to put things on autopilot.

Michael
Michael
12 years ago

I appreciate your posting this. This inspired me to finally try automatic billing. I have been short-sighted and considerably negligent with my finances due to poor planning. Thanks, J.D.

Carter Kirkwood
Carter Kirkwood
12 years ago

Paul,

Wonderfull post. How do you keep track of all of this? For example, how do you handle pulling together your documents at tax time? Have you been able to go paperless with your records?

Debra James
Debra James
12 years ago

My husband and I have set up direct deposit into our savings account, and then have a semi-monthly transfers to our checking account to cover the automatic payments and other online bill pays. The reason why we do it this way is to maximize the interest earned in the savings account. If the direct deposits went into the checking first, and then were transferred to savings, we’d lose one day of interest for every pay check (which is about 6 per month for us, because I get paid every two weeks, and my husband is on a weekly pay cycle),… Read more »

Alicia
Alicia
12 years ago

I think this is an excellent idea. How does this work with online savings accounts, where it takes a few day to transfer money between accounts? I have the ING orange account and received the $25 for opening it with a $250 deposit through a referral, but I am not sure how long it takes to transfer money to my checking and I do not think the online accounts can be set up for direct deposits can they? Maybe it is best just to continue to use this account to hold emergency funds, and to collect the thank you bonuses.… Read more »

Paul
Paul
12 years ago

Hi all, Back to answer more questions: Carter Kirkwood asked: > How do you keep track of all of this? For example, how do you > handle pulling together your documents at tax time? Have you been > able to go paperless with your records? You need to define paperless. I no longer get paper statements for any of my accounts. Everything is available online, and I can download PDFs of any of my statements. So, yes, in that respect, I’ve “gone paperless”. However, since I pay extremely careful attention to my finances, I save all my receipts and attach… Read more »

MrsMoney
MrsMoney
12 years ago

I think this is a great article. Too many people are in the dark when it comes to banking. I feel bad for people that get many overdraft fees!

I had to set up a “secret” checking account so I could keep my bill money and play money separate. It works!

Simon
Simon
12 years ago

I like ING Direct. I agree with MrsMoney. Many people are in Dark. My bank charges $12 per month just to utilize their service. On top of that, if you want to write cheques, it will cost you extra 50 cents. Robbery!

Darrell
Darrell
12 years ago

We just recently switched to online bill pay through our credit union….what a difference!! We had developed the worst habits and (at least we thought at the time), hopelessly in debt. Just by switching to online bill pay, we were able to more readily identify our leaks in the budget and correct them. In less than a month, we have been able to snowball a personal loan and an (eeeek) IRS tax payment.

Darrell

http://angrydebtor.com

Will
Will
12 years ago

For the year 2007 I did everything this article suggests except the automatic bill pay. I chose not to do this because I usually spend my paychecks to the last penny.

The compartmentalization and having accounts at separate banks helped me save (401k+cash acct) over $17,000 and pay $2,000 debt on a $75,000 income. And I live in California!

Z3trkrnr
Z3trkrnr
12 years ago

I love my ING Direct account. It doesn’t have the highest APY but you won’t get better customer service anywhere else. Also, their online interface is just easy and awesome.

Christine
Christine
12 years ago

Well I can honestly say this is a genius plan. In fact, I have tried implementing it myself. You mentioned that it would be hard to adapt to at first. It absolutely was. I say “was” because I have kind of modified the whole plan. My setup was an exact replica of yours. I had my whole paycheck going to my ING savings account. And then had transfers setup every other week to go to my Navy Fed checking (for bills) and BoA checking (for personal expenses). I am not used to the biweekly distributions so I modified it so… Read more »

Paul
Paul
12 years ago

Christine,

I’m glad you found this article useful. I certainly enjoyed writing it.
I hope you (and everyone else here) continues to find new ways to improve upon it and post your tweaks and fine tuning here for all of us to adopt!

Jason
Jason
12 years ago

I just wanted to comment on this post, because I use pretty much the same system to do my finances, and also credit “The Automatic Millionaire” with being a book well worth the read. It was after reading this book that I finally understood the power of high interest savings, and how to begin to automate things properly. Its nice to see that other people have benefited from this book, I think it is one fo the greatest finance books written. As well, I have a post on my blog that explains how I set up my automated system. Any… Read more »

Vinkash
Vinkash
10 years ago

Paul,

Great article, appreciate the tips! Wanted to add that if you want to capture all your expenses in one place, and manage them effortlessly then give DocSnaps a look.

Its is a web-based application that allows companies and individuals to capture bills, expenses, and other documents at source, automatically extract financial information, and manage their records.

Financial information can be viewed in drill-down reports or exported to popular accounting software.

Thanks,
Vinkash, Ottawa.

Douglas R. Hodgins
Douglas R. Hodgins
6 years ago

Automating your personal finances can be a life-changing event.

The question is how one should do it.

An easy way to get started is to set up an automated transfer from your checking account to your long term savings & investment account on a recurring monthly basis.

For more ideas on automating your personal finances check out this article:

http://www.mdrmoney.com/how-to-automate-your-personal-finances-automating-automation

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