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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. JPeteQ says:

    I automatically move money into my savings account every week, and I make a minimum ($10 a week) payment to one of my credit cards too, on top of my normal payment. That’s it though, I prefer to be more hands on.

  2. Izalot says:

    I automate on a few bills, after getting dinked on late charges. I review my bills. I guess the added burden is too make sure I don’t overdraft on my checking account.

  3. I’ll admit I am probably being a old fogy but I still can’t get comfortable with automation of my money.

    It comes down to making an assumption. The assumption the amounts are correct and the system will work as expected. We all know what happens when we assume.

    I’ve been burned on more than one occasion by making assumptions about financial transaction and intend to avoid any more.

    It would be interesting to hear what happened in the case of the fraud with auto bill pay!

  4. Laura says:

    Your title shouldn’t read “IS an expensive mistake” but “CAN BE an expensive mistake”. Certainly all those things can happen, and they are definitely something to watch out for, but there are workarounds.

    The automation doesn’t “make” you lazy. You were already lazy if that is the case. Just because you’re holding the bill in your hand doesn’t mean you’re going to read it. At least it doesn’t for me. Lol! If you’re busy and it needs to get paid, you’ll just write the check and tell yourself you’ll review the bill later for why it’s triple this month.

    Work out a system for reviewing the bills. Think of this as 2 parts: billpaying and billreviewing. Stop thinking of it as all one process.

    And I don’t review my bills every month. Never have, even before automation. But when I do get around to it, just cuz it’s a few months later doesn’t mean the company won’t fix the mistake (This is for utilities, etc., since there is a 60-day limit or whatever for credit/debit card disputes).

    Keeping a reserve/small cushion eliminates insufficient fund fees. I haven’t paid fees since automatic billpay was invented because we keep separate accounts. A set amount of money goes into the automatic bill pay account each paycheck. Then on the first of each month, all bills get paid. Other expenses NEVER come out of that account. So it’s not the automatic nature of the withdrawals that cause the insufficient fund fees, it’s the way you have your account set up. We’ve managed to get all of our bills to be the same each month, even if the company “doesn’t allow it”. We just average out the payment for the year and send it in. It’s not like they send you a check back for a credit balance each month. they want your money. So what if you pay over? I consider it to be a convenience fee and i’m not going to earn interest on such small amounts anyway.

    With regards to the credit card bill example above, so you’re saying the credit card company wouldn’t let him dispute it because he made a payment? So in other words, it’s okay to NOT pay in a month where you have a dispute and expect to not get dinged? Never heard of that. each time i’ve had a dispute, I still had to pay my payment. I just made sure to challenge the charge within the time frame allowed and that was that. But it’s been awhile since I’ve had a credit card so maybe things have changed and I’m thinking maybe I didn’t understand that section exactly anyway.

    To eliminate a slew of problems, don’t allow companies to “pull”. you need to “push” the payments. period. the discount they offer (like student loans) isn’t worth it in my book. Too risky. The amount you’ll save by the “pulling” company charging you a .5 percentage point less will get eaten up in overdraft fees when they pull wrong. And they will pull wrong sooner or later. But that’s a personal risk judgment call I make and may not work for everyone.

    But not letting companies pull money certainly prevents a lot of other problems. But the problems, again, are not stemming from the automation aspect, but from the pulling aspect.

    It doesn’t have to be all (automating every single thing, not just regular bills) or nothing. With regards to the “forgetting” aspect above: Send a set amount to the credit card company each month for regular payments.

    Manually send more for irregular payments. You don’t have to automate everything. Again, letting them pull and then you get dinged for it cuz you forgot to transfer money is a problem with them pulling the money, not with the automation aspect. You need to push them the money. And yes, you have to remember to transfer the money in even if you push; but for a special purchase, transfer the money into the account before you set up the automatic payment!

  5. jsbrendog says:

    i have everything automated but i still check up on it when things automatically happen to make sure they go right/happen at all.

    the one time i fall into complacency i feel like it’ll go horribly wrong so i keep myself on top of it regardless

  6. Scott says:

    I have most items automated through my banks bill pay and don’t use biller or credit card sites to pull from my bank account, especially not automatically.

    Several advantages to this:
    * I maintain control of the financial spigot. Nice to be 100% sure a biller won’t pull an extra payment after you cancel a service just because you missed a cutoff time

    * Easier tracking to have all payment histories in one place, especially with a spouse

    * Easier to prevent timing errors of scheduling a bill and not having funds available. My bank provides easy visibility and reminders into future payments I have pending

    * Credit card late fees are avoided by setting the bank to mail $25 to each of my main credit cards each month. I’m on the hook to remember to pay the rest of the bill on time, but even at high interest rates, a few days interest if I’m late is nothing compared to a late fee.

    • Scott says:

      That said, I do have a few bills go to my Schwab Visa so I can get cashback, and my utility bill too (ebill) so I can eliminate a variable amount bill.

      I also pre-pay my credit cards now and then to zero them out, regardless of current statement balance, to take some of the pressure off remembering to pay. Some credit cards offer reminders which I sometimes use.

      Yodlee keeps me on top of things, but I still appreciate having my main checking be a master account of cash outflows.

  7. Safeway_Sage says:

    I keep a summary of everything that will be auto-paid in Google calendar. It comes up as a recurrent appointment every month.

    So, I am reminded of what is going to be paid automatically and how much the payment for each item and the total is going to be. This setup also reminds me to check my checking balance to make sure I have enough in checking to cover the month’s bills.

    Finally, my little setup also reminds me of what is NOT going to be paid automatically so that I don’t ignore those bills either.

    Woot…

  8. Jessica says:

    Another thing to be careful of when automating bill pay and tying it to a credit card is having the credit card company turn off that card for whatever reason and then getting dinged with late fees when the bill doesn’t get paid.

    This recently happened to us. We have all of our bills we can set up on auto pay and when we took a 40 day honeymoon, we prepaid all of the bills that we can’t autopay, set up auto transfers to pay the minimum balance on our cc’s while we were gone and didn’t worry about the rest, figuring autopay would take care of it while we were out of the country. On the second day of our trip the bank shut off the cc we use for auto pay (even though we notified them of our travels) and since the transaction that triggered the shut off went through we had no idea. We got on a cruise ship later that day for the remaining 37 days where that cc was no longer used. We came home to late notices and fees for practically every one of our bills because the cc couldn’t be billed to, in some cases we were late for 2 months worth. We were not happy campers. In most cases we were able to call and explain the situation and the fees were removed. It still sucked to have to take care of things we thought would be seamlessly taken care of while we were gone.

    Of course this is a unique situation and it’ll never happen again since I don’t see any more 40 day vacations in our future for a looooooong time. I know we absolutely would have caught this if it happened under normal circumstances and it would have only been a minor annoyance but I think it still applies to Jim’s post.

  9. Dave says:

    An excellent Devil’s Advocate Post. Automation as an excuse not to pay attention to your finances is dangerous! For example, it is good to automatically have money taken out of your check and put in a 401(k) but you have to adjust and rebalance once in a while or things get out of whack. I pay many of my bills on-line but I do not automatically have them taken out of my checking account every month for the reasons listed. What if something comes up where I have to put off paying a bill for a week or two? I would rather have control over that than not.

  10. vtomar says:

    I agree with Dave’s comment!

  11. eric says:

    yay return of the devil! i like automating up to a point. i still don’t pay most bills automatically because i like to see the charges each month and manually pay them online.

  12. Sara says:

    I auto-pay every bill I can, including credit cards, but almost everything that can be automatically paid allows you to get a reminder as well. For example, my Chase credit card takes the full balance from my checking account on the payment due date, but I also get a reminder e-mail 10 days before the due date, which gives me plenty of time to sign into my account and look over the bill.

    My utility bills are also on auto-pay, and they e-mail my bills, so I can just open the e-mail to see if the amount looks reasonable before the bill is paid. The other thing that helps is keeping a big cushion in my checking account (at least $1000 more than I normally spend in a month), so unless I make an unusually large purchase, I don’t have to worry about being able to cover it.

  13. Kim says:

    I think you are absolutely correct. i’ve always thought the push towards total automation was risky.

  14. Elizabeth says:

    I don’t let vendors pull from my account, for the reasons outlined here and more. But I do use a different type of auto-pay, using my bank’s online payment service to schedule payments for an average amount of variable bills. I find it’s an effective safety net to ensure that bills are paid on time, even ‘stuff’ happens. Occassionally, a bill has been lower than usual and I’ve overpaid one month, or higher, and I’ve had to tack on an additional payment a few days later. But overall, it’s been peace of mind when on vacation or when I’ve misplaced bills.

  15. Jackie W says:

    Automation is okay on some things. Like mortgage. My mortgage never changes. I know exactly what it will be every month so I pay it via automated payment from Wells Fargo. Not only do I get to break up my mortgage into 2 payments by paying on the 1st and 15th I’m also paying my mortgage off early. Doesn’t sound like much but for example Dec. 15th I pay 1/2 of my Jan. 1st payment. Then on Jan. 1st I pay the other 1/2. So from Dec. 15th to Jan. 1st I haven’t paid any interest on about $700. Not bad! Doesn’t sound like much, but just by doing this I will save a couple of thousand and pay my mortgage off years early and I haven’t spent an extra dime! Automated is okay for certain things, but I agree with you, not for everything! My theory is, if I would pay this bill no matter what happened (job loss, death, etc) it can be automated. So I automate my electric & mortgage. Pretty much everything else I pay via Billpay. I love USAA!!! Thanks for your blog. Good reading…

  16. Georgia says:

    I automatically pay my utility bill (all but phone & cable on it & it is level pay) and one donation. My bank sends out checks on the date I picked. It has worked wonderfully. I have several payments automatically deducted from my cc’s, but I don’t automatically pay the cc’s. When the cut off date each month occurs, I balance and then set up a payment to pay the total amount. I check my checking & 2 cc’s each day on the computer. The reason I do this is below:

    In Jan of 09, I found one cc had been hijacked. Someone had charged 3 flights on a cc I use only on the computer. I called Citicard and they cancelled it immediately and sent me a new one. Luckily it was in plenty of time so I could reset my number with my automatic payments. Total cost – 0. All went smoothly, but from then on I checked daily.

    In this last week or so I found a very bad mistake made by a bank and they took care of it immediately, before I checked on it. I had sent a $50 check for a Christmas present. She cashed it and somehow 6,000 got added in front of the $50. My balance was a -598,+++ balance and a $1.50 NSF fee. Wow!!!! But it was taken care of. Checking every day is a bonus and it is so easy to do. Takes about 3 min. unless I find a mistake and that is extremely rare.

  17. Nick says:

    For automatic payments into a savings account, you can also take advantage of direct deposit. It may vary by employer, but mine allows me to deposit predefined amounts into 4 different accounts with each paycheck.

    I’m already using this to pay into my Roth, where $192 (=$5000/26 biweekly paychecks) is automatically transferred with every paycheck. I never get confused by extra money in my checking account because it never gets there.

    When it comes to rebalancing, I just have Google Calendar remind me every 6 months. I also keep a spreadsheet which does all the math for calculating my desired allocation across the Roth and 401k.

    However, when it comes to paying bills, especially ones that could vary month-to-month, I prefer paying those manually (through online billpay), just so that there aren’t any surprises. Besides, given how bad utilities/cable generally are with their billing, I don’t trust them with a direct tap into my checking account.

  18. Joe says:

    Within the last year and a half the company that financed my car has been bought and sold twice. Both times they have failed to notify me. I am active duty military and stationed overseas. My allotment to the original finance company was sent back and now I have learned the new finance company is trying to reposes my vehicle. What can I do?

  19. pete samuels says:

    Automation with control is fine with bill payments, as long as it’s done well. I’ve been using billstrust.com as a complete way to not having to remember due dates or paying bills. You can auto pay any bill in essence by the due date. It works off paper bills, acknowledging that most people still prefer to get them that way and stick them on the fridge.

    Just stick on a qr code sticker that they send out and then fax or scan/email the bills away – you get an SMS when the bills are paid or can view them all queued up online. Great for people/business wanting to manage cash flow and just to free up time by not having to enter all the bill info and manually pay – but want control of their bills at the same time

  20. Noffsing says:

    I have recently discovered that my DISCOVER credit card has been debiting my account which is on AUTOPAY 5 days before the actual due date. I called and asked about this practice and was told that they have always done this. My question is why should they get a 5 day float with my money. All my other autopays debit on the actual due date. I think Consumer Protection should look into this practice.


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