Automate Your Finances
Do you want to improve your financial situation the easy way?
A field combining Psychology and Economics — Neuroeconomics — attempts to explain why humans behave the way they do in certain situations. While many economic models can be simplified by assuming that their subjects always make rational decisions, that’s not necessarily the best way to look at the behavior of an individual. In short: human decision making involves many obvious and hidden biases.
Make it through that last paragraph? Good… I only have one more concept to tell you about: impulse control. Humans are good at understanding the benefits of doing things now vs. doing things later, but they aren’t always good at picking the ‘later’. We have a heavy bias towards the short term.
To take control of your finances the easy way, you simply have to understand where you are biased, and set things up in such a way that you don’t have to weigh short versus long term benefits.
Direct Deposit and Automatic Transfers
The absolute best thing you can do to override your bias for the short term is to automate your finances. You might already be using direct deposit to avoid a trip to the bank. One easy step you can take is to direct deposit some of your paycheck into a separate savings account. Simply by moving your money to a place you are less likely to access it, you improve your chances of financial success.
You already might be contributing to a 401(k). Once you have a savings account on autopilot, why not put some money into a Roth or Traditional IRA every month, automatically, as well?
Saving up for a goal a few months out? Start saving automatically in an account earmarked for that goal. Just as periodic payments are an easy way to acquire some goods (like houses), they are also a good way for you to save up for goods and services you want!
Set Your Finances On Autopilot
Daniel Kahneman won a Nobel Prize in Economics (as a Psychologist, amazingly) for his discoveries in Neuroeconomics. Luckily for us, he helped map out a lot of our less obvious biases as human beings.
Use his work to your advantage – automate your finances to avoid the situations where you might make inefficient decisions. You can increase your savings, improve your retirement savings, even pay off debt automatically.
Try it for a few months. I think you’ll be pleasantly surprised with the system you can set up!
PKamp3 is a writer at Don’t Quit Your Day Job, where they understand the mistakes they make even as they continue to make them (while writing about Personal Finance and Economics)! You can also even ‘automate your reading’ with their RSS feed.
I have had direct deposit for very long time and simultaneously have payroll deductions for my 403B, IRA and Roth IRA. I love payroll deductions and use them for savings and to fund annual expenses such as Real estate taxes and insurance
That’s the cool thing about setting it up – you start to think about what else you can automate. At this point I’ve got all sorts of automation going on and I use Mint to keep track of it all.
I love automating things! My 401k payments, and bill pay are all automatic. My credit card balances fluctuate a lot so I’ve been doing my savings contributions manually. I really should setup an auto transfer for savings to help me keep my spending down. -Sydney
I do hold off on the automatic payment for credit cards – but I pay them all off the same day so I have to worry less about messing it up. They do vary a bunch if we travel, so with those I like to guarantee I look at least once before I send them some cash.
Everything else? Fair game…
I’m ok with direct deposit and automatic transfers but I like to pay my bills manually so I can monitor them.
Yeah, I’m the same way – if it varies by month, I’m apt to keep it off ‘auto’. I’d hate to be caught unprepared by an out-of-the-ordinary bill!
If you don’t have it, you can’t spend it. 401K.. check. Savings… check. HSA…. check.
Psychology for the win for sure…
It’s like hitting the ATM. There is little accountability once you take the cash out so I find I spend it quickly. If it’s not in my wallet, I can’t spend it!
Sounds great… just be sure to check/review them. I recently had a huge cell phone bill automatically paid… I spoke with the company who reduced the fees.
Yeah, even though you are ‘automated’ you shouldn’t take it to mean ‘completely ignore’, haha. This will get you a lot closer to the holy grail of having everything work without too much work – but the devil is in the details of the phrase “too much work”… you still have to pay some attention to the bills.
I actually wrote an article awhile back about being cautious when automating your finances. It’s tempting and in some ways it is great. Im all for direct deposit, and automatic transfers to my investment accounts, etc. However, I am very cautious about auto bill pays! I have had so many errors with my cellphone bills, and credit card statements, I have long since avoided having those autopaid.
I have bills like that auto-paid, but I always look at the statements ahead of time when I get them. They come far enough in advance that there’s plenty of time to check for errors.
Yeah, Jackie’s got a good strategy with the statement scanning before the bills are paid. True automation without any sort of observation is still a pipe dream – you still need to watch credit card statements and any bill which is variable to at least some token amount.
However, the ‘automate your savings’ and ‘save for retirement’ feature is great in this strategy!
I’m all about what you are talking about. We direct deposit into both checking and saving to have it automatically done! Most bills are auto-pay as well out of checking, to keep things mostly automated!
As a practitioner of this strategy, how often do you check the bills? I log into Mint about once a week to see if everything is running smoothly – so I do occasionally see errors in bills after they happen.
Perhaps Jackie has figured out the ideal strategy – automate, but never trust certain bills!
Leaving savings completely up to us only works for certain people. A lot of people need a system that does it automatically. I guess it’s just the way we are wired. However, knowing information such as this is the first step towards financial success.
The people who it works for have no need to read personal finance blogs (maybe they do for fun?), haha. We’ve got self selection working in our favor here!
Automating my finances has made the difference between the money actually making it into Rollover IRA account – or not! After I left my corporate job to start my own business, I had to re-evaluate the way I contributed to my savings and retirement accounts. Great post, @PKamp3 – this is my first visit to Money Crush (and I’ll be back!) and I found it through your site – which I love: DQYDJ.com !
Glad to hear you’ll be back :)
Lisa, glad I could entice you to make the jump over! It’s definitely much easier to max out the investments when it’s all done outside of your sight, haha.
Also, we tried for the .com, but we only got dqydj.net. Too bad, heh.
This is so true. I automated our bills and it leads to so much more peace in our home. Paying bills each month was a stressor and now it’s just great. It’s insurance for your sanity, in my book.
Glad the strategy works for you – and it certainly does mean you only have to fight over it once! Once it is set up inertia sets in when discussing the order to prioritize direct deposit (and other automatic transfers) and things “just work”.