How To Automate Your Personal Finances
It’s intriguing when I think about finance and automation; to me, it seems second nature. So much so I am surprised when I hear from someone that they pay a bill over the phone or even use cash (paying bills with real money got me, I didn’t even think that was allowed anymore, but there we go — my youth speaks for itself).
I was the first kid in my peer group who got a personal bank account with a debit card when I was 11. My dad was annoyed that my great uncle and grandfather would send us kids cheques in things like birthday and Christmas cards because he’d have to cash them and then give us the money. He thought it was better if we all had our bank accounts to pay them into instead.
So began my relationship with digital finance.
I highly doubt I will be able to convert a predominantly cash user into having automated finances. However, I’m hoping to provide some tips for those who perhaps use a checking (current) account or credit card and maybe a savings account too somewhere.
First Of All, What is Automation?
I’ve come to realise just because I know what something is, doesn’t mean everyone else does. So I’ll include a little intro to automation in case you don’t if you already know then skip ahead, I don’t mind.
Most people I’ve spoken to when I bring up automation think it’s just a manufacturing term, for example, the automation technology that Amazon wants to use to replace their workers. But it applies to any process that is or can be, done automatically.
In terms of automated finances, we’ll be looking at how to organise in a way that allows for automatic processes to do the heavy lifting in your financial life.
What Are the Pros and Con’s of Automated Finance?
So there are both pros and cons to automating personal finance. For me, the pro’s outweigh the con’s, but that’s my opinion, of course. Some of the benefits are:
- Less time sitting on the phone to get a payment through to providers every month
- More time to spend on doing things that mean more to you
- Less worry about accidentally missing a payment date
- Often, setting up a direct debit (automatic payment) gets you a discount
- Knowing exactly how much disposable income you have without having to use a calculator (or do mental maths)
While those benefits are pretty significant, automating personal finances does come with a small set of cons or risks that are worth considering:
- Automatic payments can leave you more at risk of entering an overdraft if you don’t check in on your account, with varying (usually expensive) fees for doing so
- You could end up generally overspending because you’re not as consciously involved with your budget
- You can become lazy with shopping around for better deals when you pay bills automatically, i.e. opportunity costs
The Beginner Method
So, I’ve piqued your interest, but where do you start?
First of all, if your employer is super behind the times and still gives you a real paycheque, ask for it to be a direct deposit into your bank account instead. That saves some hassle right off the bat.
Next, set up your bills to be made as direct debits. You can usually do this online, or over the phone. In some rare cases, you have to do it in person, as I did with one of my mobile bills a while ago. If you get paid monthly, it’s likely best to set up your payments to come out the same week that you’re paid, which you can also organise over the phone usually.
The benefit of setting up payments to come out around the same period is that you know how much money you have leftover for other things after the last bill goes out.
If like me, you get paid weekly or biweekly (or just varied income in general) then it may be better at first to space your direct debits or subscriptions around so that you don’t get a fat chunk of your money taken out of one payment.
That is until you can get to a point where you can be a month ahead of your bills like I described in this article below:
Beyond having direct debits, you can also set up scheduled payments (standing orders) to go directly to any savings accounts you might have or to other persons account if you’re supporting them financially for whatever reason.
There begins your journey into automated finances, pretty cool huh?
The Intermediate Method
Before digital banks became popular, I decided to open up a second checking account with my traditional bank, though this method can also be done with a basic account or pre-paid type card. Some might think that’s strange; others probably already have multiple checking accounts.
I used the second account as a spending-only account, reserving my original account for bills-only. Doing this helped even more to separate my money, to have less risk of my original account going further into overdraft (the article I linked previously also talks about my experience with overdraft).
To do that, I calculated how much all my direct debits added up and added a small buffer amount in case of any random extra charges. Knowing that sum, I subtracted it from my regular income and then set up a scheduled payment to my second account with what was leftover. That way, I knew how much I had to spend each month on things like eating out and hanging out with friends.
Just be aware, taking out a new financial product like a checking account (something that has the option of a line of credit), will have an impact on your credit score.
Experian, one of the U.K’s main credit reference agencies recommend that you don’t take out any new financial products within 3 months of each other.
The Advanced Method
Getting into more advanced automation techniques that I have done requires a digital banking app such as Monzo, Starling, Revolut or others.
My preference is towards Monzo for one reason; while the others allow you to set aside money within your account, only Monzo will enable you to set up payments from this set-aside money.
Monzo has its proprietary system called ‘Pots’, where you can set aside money within your account so that you can’t spend it using your card. The pots system eliminates the need to have multiple bank accounts which is great.
Though crucially you can set up, for example, a bills pot, and have the direct debit payments come directly out of that pot, which means your principal balance becomes your spending money.
Granted you need to put the money in the pot yourself, but they have also introduced a ‘salary sorter’ feature that makes the process even simpler.
Bonus! Even More Advanced Automation
Now we’re getting into the extra fluff stuff that you don’t need, but it’s fun.
You can look towards IFTTT (If This, Then That). It’s an excellent automation tool that you can use for all sorts of things, but I have primarily used it to automate micro-saving.
For example, I set up an ‘applet’ (the name of the automation process in IFTTT), to set aside an extra 50 pence into a ‘coin jar’ pot whenever I used my card for spending. Micro-saving, in this way, adds up surprisingly quickly.
Though I’ve also seen people use IFTTT to put money aside for a ‘rainy day fund’ whenever it rained (bad idea in the U.K), whenever they hit a certain amount of steps per day and even as punishment if they spent money at McDonald’s!
So those are some methods that I have used and helped others use to automate personal finances.
Now I understand that information in this article might seem U.K centric, particularly towards the end. However, digital banks are popping up everywhere. Monzo now has a U.S division so you lovely U.S folks can have a go.
Go forth and automate those monies!
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.