Automating your finances

Everyone forgets to make a payment once and a while, or say they will get around to putting aside money for savings or retirement, but it never happens. This is why you need a system in place. And while I’ve read many bloggers and financial experts tout automation as a way to not have to depend on following a budget, I certainly don’t see it as a replacement, but as another tool that can work alongside your budget. As I’ve mentioned in a previous post, budgeting can be especially useful when operating on a fluctuating income.

Automating your finances can save you a lot of time, and for the most part, help you take the worry out of late payments, additional fees and how much you haven’t saved. So once you have your budget all set, use it to determine where all the money gets funnelled to. And make it automatic!

Automate your savings

We all hear that the sooner you start saving or investing, the better, yet Canada’s savings rate is hovering at all-time lows (and we’re not alone). Now, I’m not about to tell you that making it all automatic is your quick magic ticket to wealth. But I do believe that ‘out of sight, out of mind’, dollar for dollar, automating your finances can help you to save more. Here are some of the ways, that you can start automating parts of your financial life, today:

Matching the company match. If your employer participates in a defined contribution retirement plan / 401k, whereby the employer matches a certain percentage (usually 3-5%) of whatever you invest, please take advantage of it! This is by far the easiest way to double your return on investment. For many that still have their reservations about investing, don’t get fixated on all the little details. You can do this, even with limited investment knowledge. Even if you were to pick the absolute safest investments (GICs/CDs), you’re still earning a 200% return. Not a bad deal! I missed many of my early years contributing, so take it from me. See how much you can reasonably afford to contribute, no matter how small, and have it deducted right from your paycheque. One big benefit of automating your savings, is you’re less likely to spend when it automatically gets funnelled into another account.

Piling on the savings. Once the paycheque reaches your checking account, set aside a certain amount of money in your budget for all your savings goals and automate it. Have the funds directly transferred into your savings account(s) and set them up as a recurring payment. If you do any online banking, these should be a cinch to set up. Some online banks such as ING Direct will even allow you to set up and link multiple accounts within your account, to tackle specific savings goals such as an emergency fund, a newer car, or that vacation you always wanted to take. You’ll be surprised at just how quickly you can build up a savings reserve when you’re not thinking about it.

Setting up a systematic investment plan. So, you’re taking advantage of your employer’s retirement plan company match? GREAT! For everywhere else you hold and manage your own investments, see if your financial institution offers some form of an automatic investment plan. I know TD Waterhouse, HSBC and a few others offer this on their mutual funds, where you can contribute a set amount (say $100) every month to continually purchase shares in that fund, often for no additional fee/commission. It eliminates any excuse for ‘forgetting’ to make investment contributions and also can have the added benefit of saving you money with dollar-cost averaging.

Set a schedule for your payments

Direct all your bill payments to be automatically withdrawn from your checking account when it’s due. We have every single one of our bills automatically withdrawn from our accounts, whether it be cable, water or our property tax bill. You can set these up with your local utility company or service providers.

Taking your bill payment on a date. Did you know that you can also ask your local utility companies and service providers to switch your billing date? We chose to schedule some of our bill payments during the first and third weeks of the month, simply because I get paid every two weeks. Some recommend scheduling them all on the 1st of the month so you can deal with all of your bills right away. But that would mean you’d need to be able to cover all your month’s expenses before you even received your first paycheque. Doh! Maybe toss that advice, but pick dates that will work best for you and your bills.

Don’t forget about the plastic! When it comes to credit cards, you know what balance you’re used to running and while you should be paying off your balance in full every month, there are exceptions and it may not be in everyone’s interest to automatically withdraw in full every month. Whether your credit card balance varies greatly from month-to-month; or you run a business, where you need to take on a big expense for a client in order to fulfill a job, prior to getting paid; or you’re deep in credit card debt and you may not be able to pay it off in full; or any other reason you can think of. Instead of paying off the full balance automatically, consider setting an amount to be withdrawn from your account based on your average monthly spending on your credit card. And if you have any extra money left over, pay off the rest of the balance. But at least this way, you’ll never miss a payment, so you won’t get any nasty dings on your credit.

But most of all…

Don’t forget to have fun

You’ve just set up a great budget that affords you a little wiggle room, for something like a trip. Some might throw that trip on a card and deal with it when they get back… BUT, automate it and your trip will be worry-free. For example, we’re considering a nice European trip for a big anniversary, a few years from now. We’ve done a rough budget of the trip taking into consideration, flight, accommodation etc. and then divided that by the months until our trip. Voila! Set that amount to automatically squirrel away and months before your trip, when you’re ready to book, your trip will be just about paid for! How awesome is that?

But whether you’re saving for a trip, or a downpayment on a house, your retirement or paying off debt, it requires a lot of determination and desire to stick with a plan. Most are only able to stick to that plan or to a budget for a while until they resort to old ways. So you need a plan for when plans, well… fail.

Although automating your finances, is hardly a ‘set it and forget it’ (you should still be reviewing your bills and accounts), it can be an excellent tool to simplify your personal finances, help keep you on track and a powerful motivator, too.