Financial Autopilot
- Anonymous
My system consists of two simple parts:
- Automated clearinghouse (ACH) debits and credits
- Overdraft protection
For each recurring credit or debit in my life, I signed up for "direct deposit" or "automatic debit" directly from the company involved. This includes my:
- Paycheck
- Federal Tax Refund
- State Tax Refund
- Mortgage
- Telephone
- Cell phone
- Internet Service Provider
- Water/Sewer
- Electricity
- Gas
- Trash
- Auto Insurance
- Others
Note that this involves contacting each company and providing authorization for them to credit or debit your account. For a few years in the mid 90's, I used (what is now called) online bill pay where you control everything from your checking account. I didn't find this approach to be satisfactory at all, as it only seemed to eliminate the postage stamps. First of all, the online bill pay paradigm still requires you to remember to schedule all of your payments. (Most of my monthly bills are not a constant amount of money, and many of the due dates also vary from month to month.) Second, in the case of any billing or payment dispute, the introduction of a third party can be a nightmare for any timely resolution of the problem.
The second part of my system is to attach overdraft protection to my checking account. I've had overdraft protection since 1991, when I opened a revolving credit line with my bank specifically for this purpose. (The bank offered it to me when I opened the checking account.) About 10 years later, I decided to simply attach my HELOC (home equity line of credit) as overdraft protection to my checking account. If you don't have a proclivity to rack up debt, this is a truly great tool.
I don't think I could make the automated clearinghouse transactions work effectively for me without the overdraft protection. The payments are often very uneven and biweekly paycheck deposits don't always time correctly with monthly bills. Thus, if you let all these debits happen automatically and you don't want to bounce anything, you either have to spend a lot of time tracking everything very deliberately, and/or you have to maintain a large checking account balance as a cushion. I don't like either of those options.
Hence, I just have the occasional overdraft onto my HELOC. As soon as I realize there is a balance on my HELOC and I have the money from the next paycheck, then I completely pay it off. For you debt avoiders out there, this is not as bad as it sounds. I only use the HELOC as a bridge to even out my cash inflows and outflows without worrying about what my checking account balance is every single day. I don't use it to borrow money for more than a few days. When used in this way, the interest expense is very minimal. For example, if I overdraft $200 for one week and then pay it off, the interest expense is about 30 cents. (There are no fees involved - only interest charges.) Even if I did this once a month, my yearly interest expense would be less than $4. This is a bargain when you consider that you are giving up $5/year for every $100 you keep sitting around in a checking account versus a brokerage money market account - and perhaps even more, if that $100 was allowed to flow through to longer term investments. I've used this system for a very long time, and even in years where I was very sloppy about recognizing and paying off the overdraft balances, I think I still always incurred less than $10/year in interest.
So to summarize the advantages:
- Saves time. There are no trips to the bank and the post office. No time is spent writing checks. No time is spent scheduling the payments. It also allows me to block together all the record keeping to once a month, which is also a more efficient process.
- Saves money. I probably save about $50/year in postage. There are no bounced check fees ever. There are no late fees ever. At nearly all times, there is very little in the checking account. Instead, the money is earning much higher rates of return elsewhere. And of course the big bang for the buck is with the opportunity cost - the ability to have the time to make a substantial difference in income through focus on one's career and investments.
- Reduces Stress. There is no need to remember payment due dates. There is no worry about any of this when you are sick or on vacation or swamped with the occasional 65-hour work week. There is no fear of embarrassment from possibly bouncing a check, and no worry that somewhere in one of the piles of papers there is a forgotten monthly bill lurking.
This is not rocket science. Anyone can do this very easily, but I find very few people do. Certainly there may be good reasons for someone not to use this approach. For example, if you don't have very many recurring bills, it might not be worth the effort. Also, if you have issues with spending control or debt control, overdraft protection of your checking account might play to your weaknesses. (Imagine what a $140,000 HELOC attached to my checking account might do if I had problems keeping spending under control!) And some people do not like the "pull" paradigm of giving authority to another entity to take money out of your account. Or maybe you simply have a better system for yourself that saves you even more time and money. (If so, I'd love to hear about it!)
When talking with some people, however, their objections to this strategy often seem to me to involve various mental accounting errors. For example, one friend who continues to occasionally bounce checks does not want to consider overdraft protection because he "will absolutely not pay one cent of interest." A $25 bounced check "fee" is compartmentalized separately from a 30 cent "interest charge". Another friend does not want utilities debiting his charges from his account because of the way in which he tracks his expenses. As near as I can tell, the thinking is that if an automatic debit notice came in the mail, he would account for that immediately so he wouldn't lose track of it, even if the debit date occurred a few weeks later. With an online bill payment, he accounts for it at the time he schedules the transaction. Thus, if he can perform the transfer action a few weeks later than the arrival of the automatic debit notice, he somehow feels wealthier. This makes no sense to me as a $50 electric bill debited on May 30 is still the same in both scenarios, regardless of whether the automatic debit notice comes May 1 or whether you go online May 29 and tell your bank to transfer the money the following day.
So if you use a different strategy, just make sure it's for one of the right reasons I outlined earlier. Otherwise, if this system is something workable for you, you may want to consider it. I can't even begin to tell you how great it feels to let the bill paying take care of itself and allow me to concentrate on bigger things in life.
8 comments:
We have successfully used a similar approach for many years. For example, we set up automatic savings by having automated withdrawals into a separate account. As a result,we always had enough savings so that we never worried about unexpected bills. The cash was there for whatever came up. I also developed a very simple system to track our cash-flow to minimize the time, inconvenience and effort required.
I've set up all my accounts to be charged to my Visa and get airline mileage. The Visa payment is then autodebited from my checking account. I never worry about paying bills or my credit card since my salary is autodeposited.
The airline miles add up quickly and I have done a lot of free travel!
I have the same setup referenced in tim's post above except my Visa is with Countrywide. So, instead of airline mileage, I choose to get principal payments on my mortgage for my points (could do miles, gift certificates, etc. if I wanted to).
Automated finances are the best!
This is the way most people manage their finances in Western Europe (where I grew up), and I've kept that habit despite moving to the UK and later the US. The idea of writing a check, putting it in an envelope and mailing it has always sounded terribly antiquated to me. In the 13 years I've had my own checking account, I think I've written no more than 20 checks.
$50 electric bill?????
One of the best ways to regularize your expenses is to check with your local utilities as to whether they will setup an equalized payment plan.
This is a plan by which your payments are averaged over a 12-month period, based on prev year's expenses. The final month is normally used to reconcile differences between all payments made to date and the actual expenses. This results in a higher or lower payment depending on whether your current expenditures were higher or lower than the average you were paying.
It's a good way to level your higher heating bill expenses in the winter and higher water and a/c expenses in the summer.
Another great option that works for me is to use MyCheckfree, which does almost the same thing, but better. Instead of all my billers directly taking money out of my checking account before I even see it, Mycheckfree receives my bills electronically. Then, I can set up which billers I want paid automatically, on the due date. So, say, when a new electric bill comes in, I get an e-mail telling me the amount and the due date. If I do nothing, it gets paid on the due date. Otherwise, I have until then to make any changes, stop the payment, fix problems with the biller, etc. Plus, all my bills are stored and paid through one site. It's a win-win. (note: may only work in US)
We try to put everything on the Discover Card (Amex has the same deal) because we get cash back and we always pay off the balance in full each month. The only drawback is you have to make sure you have the checking balance to pay it, which means "carrying a balance".
Although it's an interesting idea to drive down checking balances using overdraft protection, I am not going to go to the trouble of opening a line of credit for it, when I can use Quicken to estimate my cash flows and schedule payments.
We do have most of our bills on autopay, and that does save a lot on postage and hassle time.
We are disciplined financially, but not ready to give up all control. It's great that it works for you, though!
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