To Automate, or Not to Automate
Lately I've been giving my personal finance systems a lot of thought. What is the best way to track my expenses (I've yet to figure it out)? Am I allocating my savings in the way that makes the most sense? Should I automate more, or less?
Right now I'm both automated and unautomated. Payments for cell phones, my yoga studio membership, Netflix, and charity, for example, are automated, as are my transfers to savings and savings subaccounts. The payments for bills like individual health insurance, gas service, and car insurance require paper checks for various reasons.
Automating sounded smart, but lately, I've been wondering if automation isn't making me lazy, which might be costing me money.
An automated world
These days it seems you can automate just about anything. Usually all it takes is a few clicks of the mouse to setup automated payments for your monthly spending, such as the following:
- Cell phone
- Membership fees
- Credit cards
- Car loan
- Student loan
- Grocery delivery
You can automate your savings by setting up monthly transfers from your checking account to the following types of accounts:
- Retirement, such as a 401(k) or Roth IRA
- Traditional savings account
- Online savings account
- Money market account
There are a lot of benefits to automating. Sure, it can take time to set up, but once the system is in place, it happens automagically. You'll never again have to hunt for the checkbook, stamps, and envelopes — in the long run, it can save time.
Automation can save money. Paying each bill the long way means you have to work with a lot of due dates and passwords each month. It's easy to forget, pay late, or pay the wrong amount and rack up fees. It's also easy to not transfer $200 into your emergency fund because you overspent or just plain forgot to do it.
It also might be a more secure method. The Identity Fraud Survey Report by Javelin Strategy and Research found that one way to lower your chances of becoming a victim of fraud is to go electronic — paper statements and checks coming and going from your mailbox aren't the most secure way to go. Also, paying bills individually online puts you at more risk if scammers install password-capturing software on your computer.
Downside of automation
While automation has its benefits, there are downsides to consider. For example, the past few months, I've been sort of just skimming my credit card statements. I used to be much more vigilant about checking statements, and catching mistakes has saved me money. Automation means my bill will be paid, whether I inspect it or not, and it's easier to let it slide or forget to review it.
Besides mistakes, you might also miss when a service provider increases their fees. Maybe it's a big enough increase that would make you want to cancel, but with autopay, it goes unnoticed. It also makes you less likely to cancel services you're no longer using, such as a gym membership. I'm not even sure if gyms still allow you to pay month-to-month, but writing a check for a membership you don't use makes it more real than an automatic charge to a credit card.
Other ways automation can cost you? Fees. Yes, we just talked about saving money by never paying a late fee, but on the other hand, if you don't keep up with the dates of your automatic withdraws and your bank balance, you could incur overdraft fees. You also might be less likely to pay extra toward debt, such as a car loan, because it requires extra steps you don't have to take.
Then there are issues with giving a biller access to your account. If they make a mistake, you are stuck sorting out the mess of overdraft fees and getting the funds reimbursed. The New York Times reports:
So how often does this happen? Nacha — the Electronic Payments Association, a nonprofit association that oversees the network that automated payments travel on, says the error rate is 38 for every 100,000 bill payments. This figure counts mistakes that banks report but doesn't include problems that consumers solve directly through the billers. (Nacha once stood for National Automated Clearing House Association; automated bill payments are one of many kinds of A.C.H. transactions.)
If an error occurs…rules…require banks to automatically credit customer accounts for the mistake. Consumers get the credit as long as they inform the bank of the problem within 15 days of receiving the bank statement with the error on it. People who miss that deadline still have recourse under federal rules, which give consumers 60 days to report the error, but the credit could be provisional at that point until the bank determines who's responsible for the error.
You'll probably get your money back, but not without some hassle. I had a related issue with an old gym membership. Two years after canceling, I saw an odd charge on my statement from a gym billing company. Turns out a new company bought the chain, and they were given my account information, so the auto-billing started up again. The issue was resolved, but it was annoying that the company would keep and pass on my billing information.
In addition, if you switch banks or have to close a credit card account, you'll have to reroute your automated system. Expiring credit cards can be a problem, as well, although as The New York Times reported, Visa and MasterCard allow merchants to get new expiration dates automatically. Unless and until that becomes the standard, you'll have to remember to call billers when your expiration date nears.
A happy medium?
I don't like how lax I've become about checking my statements. That's going to change. But I don't want to unautomate, either, so is there a happy medium?
As The New York Times article suggested, you can automate your financial life and still keep a high level of awareness, so long as you don't view automation as a set-it-and-forget-it situation. Two solutions prescribed:
- Make a list of automatic deductions and check them off against your bank statements each month. Before checking a deduction off the list, view each bill and statement carefully to check for errors.
- Keep a cash cushion in your checking account as your own overdraft protection.
That sounds like a good method that gives you the benefits of automation while mitigating the risks, but what do you think? Are you automated, unautomated, or somewhere in between? Why did you settle on that system?