There has always been a debate on whether it is better to automate your finances or not in personal finance. Today I will explore the theory behind automation and what I have found to work best for me.
The argument for automation:
An army of personal finance writers generally recommend that you should automate your finances as much as possible. The reasoning behind this is that you don’t need to interfere with a good plan. A good example would be to have your employer Direct deposit a certain percentage of your paychecks into different savings accounts. This way, you don’t have the temptation to spend the money. Once people get used to the money not being accessible, they get used to living without it.
The great thing about this system is that you actually have to make an effort to change it. People, by nature, will do nothing if at all possible. If your employer does the direct-deposit, as above, you end up with a substantial savings stash after a certain period without doing anything. This is essentially what the authorities in the US are trying to do with auto-enrollment 401(k) accounts (retirement accounts). What they are trying to do is automatically enroll employees at a certain percentage of contributions. If the employee wants to change contributions, or not participate at all, they have to physically “opt-out” of the choice. Recent studies have shown that people generally stay in, increasing their retirement savings in the process.
The downside is that you might end up being out of touch with what is happening with your finances. Let’s say, you have everything set up to move money about between your accounts. Suddenly, you are hit with an unexpected expense and your money is tied up in long-term vehicles (a Fixed deposit, for example). You have to give notice to withdraw the cash, so are forced to put the expense on a credit card, with all the interest and fees involved.
The other side: Un-automate
You can un-automate to make yourself more aware of where your money is going to and where the money is coming from. One way of un-automating is to physically go through all your bills, make sure everything is correct and then write the cheque yourself. This way, you feel the pain of having to pay a bill. You also are left with the painful memory of having you money disappear into a black hole every time you whip out the plastic.
Un-automation keeps you on top of your money, but it is also very easy to miss a payment if you don’t have a good system of keeping track of everything. This could cause late payments and overdraft fees and potentially affect your credit score. I generally recommend for those in serious debt to un-automate, so they become more aware of their money style and weaknesses.
The jury is still out on which of these techniques are better.
Personally, I am a fan of un-automating. I get a rush, after getting paid, in dividing all my cash and placing it in different targeted savings accounts, for the different savings goals. I also like doing a Net Worth spreadsheet and paying my bills manually every month. This way, I can get a feel of the “cash flow” aspect and get a better idea of when I will be short of cash. This causes me to very rarely overdraw accounts, even though I keep my balances very low in the low-interest-bearing accounts.
What do you find works better for you? Drop me a note in the comments section below…
Kevin Mzansi
Image by ktylerconk
Hi Kevin,
A tip I read somewhere was to have one’s income deposited into one’s savings account. From there you then transfer a budgeted amount to a current account to spend on your life expenses.
This turns the process around in one’s head and causes you to save first (pay yourself first) and spend second. This is as opposed to income coming into your current account, where you spend first and then (perhaps) put the balance into savings.
Nice tip, Wietze!
Many people always complain that there is too much month for their salaries, especially in “Januworry”. I’m also a huge fan of figuring out some way of saving first and then budgeting for the rest.