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Automating Your Finances is an Expensive Mistake

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This is a Devil's Advocate post.

Automation Robots!The allure of automation is obvious. Look at the famous Ronco Rotisserie catchphrase – “Set it and forget it!” Automation is appealing because it lets computers do the work and lets you do something else more interesting. Set your 401(k) contribution each month, set the allocation, and then go spend time with your family. Set credit cards on auto-pay, go all electronic for the statement credit and for the environment, and spend more time playing video games and watching television.

I get it and I love automation too, but there’s something you should know… automating your finances can lead to bad habits, bad habits can lead to tragic losses and big mistakes. In this Devil’s Advocate post, I explain why automating all of your finances can be an expensive mistake.

Automation Makes You Lazy

Every working adult who contributes to an employer defined contribution plan, like a 401(k), has automation in their life. You pick a percentage of your salary to contribute towards your retirement and then you let it do its work. You focus on doing a great job, landing the next promotion, and securing clients while computers make sure you contribute each month towards the future.

It makes you lazy because that’s where many people’s involvement with their 401(k) ends. They don’t rebalance, they don’t review their investments with their goals, and only react when something crazy happens – like the start of the recession last year. Near retirees discover their allocations are far too heavy in stocks and now they can’t retire on time. Young professionals panic as their balances crumble, not realizing that they are 40 years away from touching the money, that the drop in the stock market actually helps them in the long run because they can buy stocks on the cheap.

Automation has the potential of making you lazy and you may reaction emotionally, rather than strategically.

Out of Sight, Out of Mind

The idea of regularly contributing to your 401(k) is very powerful because in that case, laziness is in your best interest. If you forget that you are contributing to your 401(k) each month, there’s very little downside. If, however, you setup automatic transfers from your bank account to a high yield savings account, there can be consequences.

Let’s say you regularly transfer $100 each month from your checking account to an ING Direct savings account. The $100 goes to a savings account earmarked for your first home. It’s a great idea and I fully support it. You also learn that this year you’ll be getting a $200 bonus… hooray! That’s great news, congratulations! So you log into your checking account and see that you have $500 in there, so you setup a transfer of $400 figuring the extra was just accumulated savings over the last few months. Then the automatic transfer happens, your balance is now $0. Then you get dinged for minimum balance fees or maybe you use your debit card… Zing! Insufficient funds.

Automating your savings is a good idea… but you have to stay diligent and remember you’re doing it, or you could shoot yourself in the foot.

Risks of Autopay

More and more companies are now offering auto-pay, where your bill is automatically paid in full with a credit card or bank account. In theory, it’s a great feature because you would certainly be paying many of these bills in full (electrical, cable, water, etc.) but there are several huge risks to be aware of:

  • You forget. The whole argument of “out of sight, out of mind” from above holds true again. You forget that you made a big purchase this month on your credit card, you intended to transfer money out of savings, but the autopay was early and you got dinged.
  • Once you pay, your ability to dispute fraud is diminished. Earlier this year I read a story about a retiree who became the victim of credit card fraud. Normally this isn’t a news story, since your liability for credit card fraud is limited to $50 by federal law and most companies offer $0 fraud liability. The wrinkle in his case was that he auto-paid the bill, without reviewing it beforehand, and so he implicitly agreed to all the charges. I don’t know the end result of that story but it certainly involved headache.
  • Unexpectedly large charges, fraud or otherwise, really mess up your week. There’s the risk that you forget about the autopay, which is kind of your fault, and then there’s the risk that an error or fraud starts a cascading series of fees. Maybe your energy bill spikes up because your water heater fails or there’s a billing error on your cell phone that racks up a $10,000 bill. If you autopay, you may be out a lot of money for a long time while various companies “investigate.”

Summary

Automating your finances can be great if you’re able to keep on top of it. If you’re doing it to unload some of the work, such as not having to review your statement or log in to click “schedule payment,” you might want to do yourself a favor and keep some of those tasks on the manual list. Automation works great for things that have no dependencies, such as 401(k) contributions, but for everything else, consider doing it manually (especially if doing it requires only a few mouse clicks!).

What are your thoughts on automation? Where does it make sense and where could it introduce headaches? Are there things you do to mitigate the risks of automation in some aspects of your personal finances?

(Photo: genewolf)

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57 Responses to “Automating Your Finances is an Expensive Mistake”

  1. Ken says:

    What has bit me more than once is forgetting to make the online payment. A second issue is me and my spouse assumed the other paid it. Not good. I’m still struggling with this automation thing but I think the good outweighs the bad.

  2. Beth says:

    I agree you have to keep on top of things. I recently caught my cable company charging me DOUBLE my normal bill because they added a “free trial” without my knowledge and then started charging me for the package once it was up.

    Luckily, I keep tabs on everything I have automated, so I caught the error. I was able to dispute the charges and get a refund. However, if I hadn’t been paying attention and a few months had gone by, all I would have been able to do was cancel the additional services.

  3. Tim says:

    I have to agree with the other comments so far. Automation is the way to go, it saves me time and late fees. You should still check your bills but at least if you don’t get around to checking it right away, you know your bill was paid. I can’t think of a time where my bill was wrong but I can think of numerous times where I got hit with some late fees.

  4. Tom says:

    I employ a semi-automation process. By having all bills auto-paid by my credit card but still paying my credit card manually, it provides a stop-gap which allows me to review the purchases of the past month and catch errors that otherwise could be quite costly.

    • Jim says:

      That’s a good approach that automates a lot but still has a safety valve in place in case anything strange/bad happens.

    • Foo Finance says:

      I do the same thing! I rack up Skymiles, have AMEX’s $0 Fraud protection (no questions asked, no forms), and check my bill when it comes time to pay.

      The other bills that I have that don’t take plastic I do manually with ING. I have them set up in bill pay but have to manually enter and send the payments. I am forced to check my bank balance as well as monitor them for increases and decreases.

  5. zapeta says:

    I try to have the best of both worlds. I have an automatic payment set up on all of my credit cards to make the minimum payment but I log in each month to check the bill, pay the balance in full, and cancel that month’s automated payment. This way if I forget I don’t get hit with the late fees but the payment gets made. The minimum payment amount is usually under $20 bucks and that isn’t enough to get my checking to a situation where the payment would cause me to overdraft.

  6. I’m with the devil’s advocate.

    Automation takes your brain out of the equation. It allows decisions made years (dare I say decades?) ago to rule your economic life.

    It’s mandatory to be aware of your important monetary decisions and – only when necessary – make changes. Ignorance is NOT bliss.

  7. Yeah, I like to make sure my eyeballs review a bill before it gets paid.

    @Ken – we have a low tech solution to your problem at my house. We have a desk calendar near the mail “inbox”. We mark all bills down on the date they need to be paid. When they are actually paid, we simply note this on the calendar. This way, each of us knows if a particular bill has been paid.

  8. cubiclegeoff says:

    For me it’s a control issue. I like knowing that I paid it and it has gone through. I can’t trust companies with my information. However, once my family gets bigger and I have more things to think about, I may change my ways.

  9. gstaran says:

    I setup automatic payment for pretty much all the bills, but do check the statement before the due date.

  10. I also think there’s a balance to this strategy–I enjoy having some things automated, but make sure to stay on top of everything. In other words, the “automatic” is really just a fail-safe if I happen to land in the hospital for two weeks, or some other catastrophic event.

    I think having a “manual” connection to your money is so important, because it keeps the pain of spending active, and keeps you aware of the money shuffles going on between everything.

  11. Chelsea says:

    I think if you automate only in service of allowing yourself to completely forget about your finances indefinitely, well then yes, this WILL catch up with you.

    However, for forgetful people like me, automation is a life saver. To avoid things like accidentally paying a credit card that’s paid off (with recurring payments) or overpaying bills, you also have to set up one LAST form of automation: calendar reminders to check-in on all of your accounts once a month or so.

    Chelsea from TurboTax

  12. I am in favor of automation when it comes to saving money. This is a good thing to “set and forget”. When it comes to bill payment, I don’t allow any company to automatically debit my account. People make mistakes and if you aren’t paying attention, you may not catch the mistake until it is too late or not at all.
    I review all of my monthly statements to make sure there are no errors and then I go online to the billers website to make the payment.

    • Shirley says:

      I agree. I manually pay online with my Discover Card (for the cashback bonus) wherever it is accepted.

      Online bill pay service has all the rest set up to be paid manually. I pay them when the bill arrives (email alerts are great).

      I don’t want anybody taking anything out of my checking account without me authorizing it first.

  13. Dubary B says:

    I just put my credit card to be auto-paid this month and I have become a little paranoid that for some odd reason it might not pay it,or it might not go through. I have been checking it every other day to make sure things are set. This is the first time ever I am using auto-pay hopefully it goes fine!

  14. Tyler says:

    My solution is to automate everything and then aggregate all transactions in one spot for occasional checking in.

    All my savings transfers are made automatically. All my bills are paid automatically. All my investments are made automatically.

    My checking account is the central hub for all transactions and I keep a large cushion in there to offset any poorly timed “mishaps” (though I haven’t had any yet).

    With all this going on, I make sure ally my accounts are tied to Mint so that I can go in every few weeks and review transactions. That way, I can throw a stick in the cogs and put on the brakes if anything peculiar shows up.

  15. ziglet19 says:

    I have used autopay on bills that don’t flucuate, such as my internet bill. However, for other bills that change, such as my electric bill, I schedule my own payments, that way I have time to look at and review the bill.

  16. MichaelM says:

    I set up auto-pay in ING Electric Orange. I feel like it gives me the benefits of auto-pay while leaving me in control.

    Why?
    1) I am the one sending out the money. No one is pulling money from my account. (Though you can configure many billers to inform ING how much you owe.)

    2) I get an e-mail from ING when a payment is scheduled (usually about 3 weeks before it will be paid). I then have the 3 weeks to cancel the payment if I was billed incorrectly, or to arrange for sufficient funds to be in my ING account.

    3) I get a little bit more interest. ING shows you when bills will be paid based on when you send them out. I schedule all bills to be paid the day before they are due. Money stays in my account a little longer, and I don’t have to worry about sending out my payment on the due date to get that benefit.

  17. mikestreb says:

    I like how I have my finances setup. My bank is able to electronically pull my bills into their online billpay system. When I login, it will tell me if there are any outstanding bills, how much is due and when they are due. From there I am able to see a PDF of the bill, review it, and tell my bank what to do (pay in full, pay x amount, etc) and they will send the payment over on the duedate via ACH (they guarantee it will get there on time or they pay the late fees, interest, etc.).

    I would say my psuedo-automated finances are working great!

    Tough part is finding a bank that is able to do what mine does. It took me 6 banks to find the right one. mine is http://www.smbtonline.com (only for missouri and arkansas residents, i think). and it pays 5+% on my checking balance.

  18. “Automating Your Finances is an Expensive Mistake”

    So far I’ve managed not to be thrown out on the street because my account got unexpectedly overdrawn. It seems fine.

    Also, I never get bills in the mail or ever worry about due dates for them, which is nice. The *only* bill I actually write a check for is my rent.

    But hey, be paranoid if you like that you electric company is trying to scam you for $7, all the other personal finance bloggers (and readers) are doing it, you want to be one of the cool kids, don’t you?

  19. daenyll says:

    I set up the payments each month online for credit card and utilities, takes at most an hour each month to check and set up for the withdrawals, but I will not set it for automatic payments. I like to see the bill and put it into my budget spreadsheet so as to check for errors and avoid unpleasant surprises.

  20. fairydust says:

    I have utility bills and things like the monthly newspaper delivery bill on autopayment with a credit card, but I don’t autopay the ccs – I get alerts when the cc statements are posted, check each one carefully – which means checking all the autopays that happened during the month – then set up the payment in full from checking. Like another poster above, I’m a little afraid that if I also pay the ccs by autopay, something will go wrong and all heck will break loose, so I’ll keep setting those payments up manually. I have the cc statement dates also noted in my calendar, so that’s a backup just in case one of the monthly statement alerts doesn’t get through via email.

  21. lostAnnfound says:

    I like Tom’s idea of automating bills to a CC and then manually paying the CC. Much more streamlines than paying everything manually, but still check how much is being paid where on a monthly basis.

    The only thing I have automated at this point is savings with ING and to me that is not an expensive mistake. Before I would save IF there was money left at the end of the week. Now I save BEFORE anything else gets done. It’s taken from my checking account once a week and I am prompted by Quicken to enter it is a recurring transaction. Out of sight, out of mind in this case has been beneficial.

    However, I am not quite ready to go on auto-pay. I may not be paranoid that my electric company is skimming an extra few dollars, but even in this day of computers mistakes can be made & if so, I want to catch it before it goes too far.

  22. otipoby says:

    My biggest problem is the different methods of automated bill pay. Most of my utilities will do a direct withdraw from their system as well as my bank has a scheduled payment system.
    Personally, I prefer using my banking software for all/most scheduled payments. This way, they are all centralized and I do not have to remember various passwords. Also, I try to group my payments around the 1st or 15th of each month so I don’t forget one.

    • Shock says:

      This is my method. All my bills are paid through online banking, making them centralized. I set up alerts to tell me when I get a new bill. I put all my bills on my Google calendar to keep track. I use “You Need A Budget” a.k.a. YNAB to budget my money. I invest in a target date fund in my 401k so that rebalancing is done automatically.

  23. Alex says:

    I think this article speaks to the lack of responsibility that a lot of people have (yes, I know it’s a devil’s advocate post).

    I understand the risk of fraud, but with everyone’s awareness about it and most companies having some limited consumer liability policy, I am a lot less nervous. What does make me nervous is automating payments according to a monthly schedule when most people get paid biweekly. THAT makes me nervous about over drafting and what not.

    What baffles my mind is that people can’t take the time to plan these things out. Granted, I’ve made the mistake once before, but it was ONCE. After that, I figured it out and moved my billing dates to allow myself time to recieve my next paycheck by spacing out the majority of my 2 weeks apart.

    I don’t think what I did was rocket science. It’s irresponsible to not look at your statements and whatever punishment you incur is deserved (unless there were extenuating circumstances).

    I automate every payment that is static (does not change from month to month) and utilities. Everything else is done online, either through the payee’s website or through my bank sending a check on my behalf. And then everything gets verified in Quicken once or twice a week. I know where all my money is going and whether or not I can make the payments (eve if I splurge every once in a while =]).

    Love the site!

    • Seth @ Boy Meets Food says:

      @ Alex,
      I just wanted to let you know that when lecturing others about their “lack of responsibility”, you lose significant credibility when you then mention that you are spacing your payments out to accommodate biweekly paychecks. I find it difficult to accept financial advice from anyone living “paycheck to paycheck”. Anyone who actually has control over their finances, does not have to worry about “whether or not [they] can make the payments”.

      Note: I realize that I know nothing of your financial situation, and don’t care to… I just wanted to alert you to what I saw.

      • aua868s says:

        sorry to see you ridiculing Alex’s financial situation (I am not aware of his/financial status…not that I intend to)..but, a person living a life paycheck to paycheck need not reflect his/her “financial responsibility” i do not endorse/despise Alex’s views but the comment on a person’s financial status when he/she is financially responsible is totally uncalled for.

        peace and happy holiday season!

  24. Forgetting what I automate is a real problem for me too. I already have medical problems that affect my short term memory so I have to be really careful.

    • Alex says:

      You should look into what someone else said they did in one of these comments….

      Most banks offer some kind of “Bill Pay” service, in which you can pay all your bills through them online. For my bank, it costs $4.50/month and I can go online and setup my payments. That would work for you because it’s all in one spot. Look into it; it mght be a really good idea. Hope it goes well!

  25. RJ Weiss says:

    I automate as much as I can. However, just because I automate doesn’t mean I don’t review.

    I still review the budget and calculate my net worth every month in a spreadsheet.

    Automating makes things a lot easier, but isn’t the answer for everyone.


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