For most people keeping track of payments is a chore, like doing the dishes or the laundry. The last two were automated decades ago by the invention of appropriate machines which do the tedious work. You can choose to automate your payments and save yourself some time, money and remove the worries about keeping a calendar to avoid running late, paying fees or even hurting your credit score when you have more important things to do or, are in a holiday relaxing.
The KISS principle in personal finance
The most significant benefit of payment automation is simplicity. After the initial set-up, the system takes care of everything for you, as a diligent personal assistant. However, you should spare about 15 minutes a month to check that everything is going according to plan, including the money you had to get and the payments you were supposed to make. This can be summarized as keeping it simple and safe (KISS).
After you take this step, you will see multiple benefits in your life, like less paperwork to do, fewer worries about missing a deadline and hurting your score and a better organization of your finances. When the amounts are withdrawn from your account and sent to fulfill payment obligations before you even touch the money it minimizes the chances of spending them on meaningless items and letting utilities or credit cards unpaid.
Raise your FICO score with automatic payments
Since we mentioned the FICO score, you should know that automatization of at least your minimum amounts of the credit card can help boost your FICO score, since the payment history accounts for 35% of the total score. The items considered are credit cards, retail accounts, installments, and mortgages. Depending on your bank and credit card company all or most of these could be on auto-pilot.
However, do pay attention and create a calendar that correlates the days you get money to the due dates on your bills, especially if you have multiple income sources. The trick here is to get a few buffer days in case the transfer is late to avoid paying penalties. You only need to think about this once. Self-employed with multiple clients should avoid doing this unless they are sure the account that is supposed to pay the bills always has enough money. Missing a few times could have the opposite effect and lower your score, like in this story about a person who went from 700s to 100s.
Be in control of your wallet
Automation can sometimes trigger an “out of sight, out of mind” approach to your finances that is detrimental. Even if you take out the routine clicking, you should still be in control and diligently check both the bills you receive, the actual processing of the transaction and the availability of funds.
It helps if you first draw a budget, with receivables and payables to make sure you can automate as much as possible and don’t leave anything unattended. To start the automation process, first, you must contact your bank, employer and other financial and credit institutions you have connections to.
As soon as you receive your payment be sure to match your employer’s contribution to the 401(k) or you are just leaving free money on the table. This is one of the best candidates for automation and even if you do not have such a plan from your employer, then do the same with a Roth IRA. In this way, you can be sure to have something put aside for old age.
Deposit the remaining money into a checking account and pay yourself first. That is, in fact, another way of saying, think about savings before bills. It might seem counter-intuitive, but having a safety net prevents a snowballing effect of debt in case you have some cash flow problems.
The bulk of your paycheck (about 80-85%) can now go to credit cards and other payments you must make each month. There is even a flowchart available on automating your finances the right way, but be sure to check with your employer, bank, and credit card issuers that their systems communicate with each other. If you are self-employed make sure all your clients pay you in the same account that is linked to the automatic payments bucket to avoid defaults and lack of funds.
As previously highlighted the most dangerous trap of automation is negligence. Just because you think an algorithm is taking care of your bills, it would not hurt to check it. You can start by setting some e-mail or SMS alarms whenever there is money going in or coming out of your account. This will show you any problems in due time and let you take corrective measures immediately.
Most banks offer the automation of payment service. You might already have it in your basic package. If this is not the case, don’t hesitate to ask the clerk about the associated fees. Usually, they are negligible, but it is always better to ask than to be amazed. If you want to pay directly with your creditor’s online tools, as Wisebread warns, you could face a maximum number of allowed payments during a certain time-span. Be sure to ask them as well about this situation.
Keep yourself accountable by using a personal finance app. Anything from a simple Excel sheet to dedicated apps can help you have a better understanding of what is the natural course of your cash flow. Some apps offer the option to automate payments directly from your phone or to authorize them, after checking your account and even to check your score.
Automating your payments done the right way can be your ticket out of debt and your first step to a better FICO score, a lower interest rate and deriving benefits like no sudden rate hikes or late fees. However, this does not take away the due diligence part. You should treat the automatic system like an assistant. It does not mean that you do not trust them if, at the end of the month you check the accuracy of their work and point any mistakes.
For those who are too busy living the moment, the best feature of automation is that it takes care of your finances for the silver years without you thinking about it. In 20-30 years, you will thank your younger self for this small gesture.