You go on vacation, have a wonderful, relaxing time, and then come home to a slap in the face. Somehow, in all the rush, you forgot to pay a credit card bill ahead of time. By the time you got back you were late, and now you face a late charge, interest-rate hike or some other punishment.
Just about everyone has this kind of story. So, what’s the solution?
Total automation is the most obvious, but it has drawbacks of its own.
Today, it’s possible to make just about all cash flow automatic. You can have your paycheck automatically deposited in your checking account. Then you can have investment money drawn off by your broker or mutual-fund company. Bills can be paid automatically as well, drawing on a credit card or checking account. And you can use overdraft protection in case something goes wrong.
A few years ago, total automation was pretty unappealing, as many of us just didn’t trust new systems. But now we have years and years of experience with ATMs, online banking, Paypal and Internet shopping. Trust is no longer the main issue. The real issue is whether total automation means losing control, letting your guard down.
Of course, automation doesn’t mean flying blind. You can, and should, continue to watch over all your accounts, just like a pilot keeps scanning the dials while the computer flies the plane.
Anyone who sets up an automated financial system should use the alert features that will send an e-mail or text message if, for example, a checking balance falls below a set threshold, or when a credit card balance gets close to the limit. Other alerts will inform you that the card billing cycle has ended, or the payment deadline is approaching.
If you use a calendar in your computer or on your cell phone, you can set up reminders of key dates, like your monthly credit card payment deadline.
For most people, a hybrid system is probably best. To minimize confusion, automate only regular events that have a fixed sum or tend to fall in a predictable range. This would start with having your paycheck automatically deposited in your checking account. Then you would automate the mortgage and car payments, and perhaps the utilities bills.
Savings and investments are also good candidates for automation. That way, you don’t leave cash in your checking account too long, earning nothing. Automating investments helps you avoid the temptation to skip a month here and there for some indulgence, and it provides the benefits of dollar-cost averaging.
Remember, though, that you still need to watch your investments’ performance, and to rebalance your portfolio when the asset allocations get off target. Your transfers to savings and investments also need to increase each year to keep up with inflation and your growing income.
Other types of spending are not good candidates for automation, because they really demand constant scrutiny or they’ll get out of control. So although you might automate the electric bill, you probably should not automate the cable bill, else those pay-per-view charges mushroom.
Groceries and gasoline, though necessities, probably should not be automated because there’s always room to economize if you keep a close eye on spending.
Entertainment, meals out, vacations and similar non-essentials probably should not be automated because they’re the least essential spending, the first candidates to be cut if money gets tight. Automating these expenses just makes it too easy to let them balloon.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.