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Put Your Money On Autopilot

Automating your finances isn’t rocket science, but it’s still the best way to save more and worry less. Here, our easy guide to automatic finances.

How to Put Your Money on Autopilot

If I’ve learned one new thing in six years of blogging about money, it’s this: The most important factor in financial success is not having a budget, meticulously avoiding debt, or choosing the right investments. It is having a system that makes the right financial moves for you. Automatically.

The key is to put your money on autopilot.

Why does something so simple matter so much?

THE BEHAVIOR GAP

Because we’re human, and we do stupid things. In his blog and new book by the same name, doodling financial planner Carl Richards coins this “The Behavior Gap“.

Looking at the long-term returns of investments like the S&P 500 compared to the returns of individual investors, Richards found that the investors consistently did worse than the investments. He explains the difference, The Behavior Gap, as humans’ tendency to let emotions influence decisions (for example, to sell off stocks during scary economic times or buy a particular stock based on a tip in the financial media).

Emotions can lead us to make a lot of terrible financial decisions like:

Putting your money on autopilot can’t stop us from all of the stupid things we do, but it goes a long way in protecting ourselves from two of the most common:

  • Ceding to temptation.
  • Being lazy.

TEMPTATION

Emotional decision-making is part of the problem; pure temptation is another. If you have ever tried to resist a temptation—to turn down an extra drink, to surf YouTube instead of working, to buy something you shouldn’t—and failed, you know what I mean.

Psychologists have shows that although it is possible to stretch and strengthen our willpower like a muscle, our ability to self-regulate is a consumable resource that depletes. What this means is:

  • The more we exercise self-control, the better we become at it in the long-run.
  • BUT, the more we use self-control in the short-run, the harder it becomes in the short-run (Muraven and Baumeister, 2000).

So if you focus on not procrastinating every day for a month, you may find it easier to diet next month. But if you’ve had a particularly exhausting, stressful day at the office and you’ve been fighting off distractions to get stuff done, resisting the candy bars in the checkout aisle (or going out to dinner even though you don’t have the money) may be all but impossible.

Although we can work to improve our self-control in the long run, as humans we’ll always be susceptible to moments of weakness when our self-control is depleted. To prepare for this inevitability, we can alter our environments to remove or reduce temptations.

An obvious example is that cliché advice that debtors should cut up their credit cards or put them in a block of ice. The next time your willpower is depleted and you want to charge the Forever Lazy you saw on a late-night infomercial, you may have second thoughts by the time your Visa defrosts.

LAZINESS

Sometime we do stupid stuff because we are emotional or tempted. And sometimes we’re just lazy.

If you currently pay for a monthly subscription that you don’t use—a gym, a magazine, $12 a month for DVR service on cable—and don’t do anything about it, whose fault is it? The recurring-subscription business model that gyms, cable companies, and Netflix use is one of the most stable and profitable in existence. And guess what? It is built on the simple fact that people are lazy. When we stop using something, most people will pay $20 or more each month for many months before making a 10 minute phone call to cancel.

Laziness hurts our wallets in all sorts of ways.

Overspending on credit cards or paying for unused subscriptions are just a couple of ways our behavior sabotages our finances. Other examples include:

  • Forgetting to pay bills, incurring late fees and credit penalties
  • Depleting savings by comingling them with everyday spending money
  • Failing to invest enough for retirement
  • Failing to invest in regular intervals

There may be different reasons for making these mistakes, but don’t discount laziness. If you’ve ever thought of cancelling something you don’t use or opening a Roth IRA or increasing your 401(k) contributions and said “I should look into that” but haven’t done it yet, your laziness has already cost you money.

WHY AUTOMATION IS THE ANSWER

Think about your daily habits.

Most likely, you brush your teeth every day and don’t even think about. It doesn’t take willpower to brush your teeth. It’s automatic.

Now think about something you’d like to do but are struggling with; perhaps it is to quit smoking, lose weight, or spend less.

These things are difficult to do. They take conscious effort—active self-regulation—to achieve. Meanwhile, the corresponding bad habits (smoking, overeating, spending money) have become automatic.

But talk to somebody who has successfully changed a habit—for example, a daily exerciser—and you’ll hear that  it’s the good habit that is now automatic. Getting out of bed to jog becomes as routine as brushing your teeth.

Your brain has an autopilot!

When your can teach your brain to include a habit on autopilot, maintaining it takes much less effort, if any at all. Better yet, seemingly tiny habits can have big ripple effects.

In the book Willpower: Rediscovering the Greatest Human Strength, the authors explain how even small automatic behaviors can trigger better decisions. For example, have you have ever felt like when you’re well dressed, you work harder? There’s something to that.

Studies show that little habits like shaving, dressing neatly, and keeping an organized home correlate to more self-control in other areas of life. People who exhibit these behaviors are more likely to exercise, eat less, moderate alcohol, even use condoms more often.

So the more good habits you can put on autopilot, the more success you may have regulating other areas of your life.

And when it comes to putting your money on autopilot, your brain has an ally in technology. Twenty years ago, automated personal finances were impossible. Having your paycheck directly deposited was still cutting edge, and paying bills meant cutting a check every single month. Today, it’s not only possible to have an entirely electronic checking account, it’s becoming the norm to do away with paper checks altogether. And these new financial technologies make it possible to put your money entirely on autopilot.

A SIMPLE APPROACH TO PUTTING YOUR MONEY ON AUTOPILOT

As you get older, your finances will get more complicated whether you want them to or not. So the simpler you can keep your financial system, the better. Two primary accounts—one checking and one savings—should suffice unless you own a business or are married with separate finances.

The Three Steps to Automatic Finances

  1. Put your savings on autopilot
  2. Put your bills on autopilot
  3. Put your investments on autopilot

Here’s what somebody’s basic financial autopilot looks like.

Autopilot diagram

Today we’ll cover setting up your savings and bills, next time we’ll talk about investments.

Put your savings on autopilot.

The first step in putting your money on autopilot is to pay yourself first. This means directing a portion of the money you earn into a savings account as soon as you earn it.

  • If you’re still working on your emergency fund, put this money towards that.
  • If you’re in high-interest consumer debt, put this money in an account that automatically makes extra payments on your debt each month.
  • If you’ve funded your emergency fund, then put this money towards your next life savings goal (e.g., a house, a car, a wedding, or a vacation).
  • If you’re set on cash, skip this step and focus on investments instead.

There are two ways to pay yourself first:

  1. Split your direct deposit between your checking account and savings account (ask your HR manager for the form).
  2. Set up an automatic transfer between your checking account and savings account on the day after you are paid. Any online savings account will make this easy.

Put your bills on autopilot.

In part one of this series, I talked about your “nut”, the fixed monthly expenses like rent, insurance, and student loan payments, that you pay every month in the same amount. Once you have a comfortable bank account buffer in place, the next step in putting your money on autopilot is to setup automatic bill payments to each of these bills. There are different ways to do this, and I rank them in order of my preference.

  1. Pay with a rewards credit card.
  2. Pay with your banks online billpay.
  3. Pay through an automatic bank draft (ACH).

Let’s talk about the options:

Credit Cards. Some billers like insurance, cable, and cell phones let you pay with a credit card. As long as they don’t charge a convenience fee to do so, this is your best bet. For one, you can earn your one or two percent of the bill back in rewards and two, you have a third party in between you and the biller. (Remember one of the best things about paying with a credit card—not cash check or debit card—is your right to dispute the payment with the credit card company and not pay a dime until that dispute is resolved).

Online Billpay. The next best option is setting up a recurring payment through your bank’s online billpay service. I like this option because you have control over multiple bills in one place (your bank’s online login). You can stop or change payments to more than one bill instantly in one place. For help finding the best online bank account read my Banking Tips and Reviews.

Autodraft/ACH. Traditionally, if you wanted to pay a recurring bill automatically, you have to sign up with the biller, give them your checking account and routing number, and let them automatically withdraw the bill amount from your checking account each month. This is fine, but there are some concerns:

  • Redundant Maintenance. You must maintain your autopay with each biller individually. If you change banks, for example, you have to remember to change the accounts at each biller.
  • Less Control. Let’s say you accidentally rack up $3,000 of data roaming charges on your phone while travelling abroad. Since you’re travelling, you forget to check your bill before the autodraft goes through. Your cell provider withdraws the $3k from your checking account and overdraws the account. Not only are you out that money and responsible for overdraft fees, you may lose your ability to negotiate the charges down (after all, the cell company already has your money).
  • Returned Payments. If you have your checking account to reject overdrafts, your auto payment will be returned if you don’t have enough money in the bank at the time it’s processed. This may trigger a returned payment fee in addition to late fees from the biller. (Also, be sure to enter your checking account numbers correctly when you enroll at the biller’s Website. You payment will be returned if you make a typo, too.)

Put your investments on autopilot.

Once you have your savings and bills on autopilot, the last (but I would argue most important) step is to set up automatic investing. We will cover this in detail in part four of this series.

RECAP

We humans are emotional, easily tempted, and lazy. We do stupid stuff with money. Therefore, it’s my opinion that the single most important thing you can do for your finances is to put your money on autopilot. Start by transferring a percentage of your income to a savings account as soon as you get paid. Then, setup all of your bills to be paid automatically by their due date either by credit card, bank bill pay, or ACH autodraft. Next time, we’ll talk about the final piece of the puzzle: establishing an automatic investment plan.

ACTION ITEMS

  1. Pay yourself first. If you haven’t already, open a separate high-yield savings account and set up an automatic transfer or split direct deposit to correspond with every payday. Do this even if you can only afford to save $20 a paycheck. You can increase the amount later. Having the system in place is what matters.
  2. Ensure you have a bank account buffer. Do not proceed to action item three until you have this in place.
  3. Put your bills on autopilot. With a bank account buffer in place, put all of your monthly bills on autopay. Set aside an hour to set this up tonight and you’ll easily save an hour a month for the rest of your life.

Join The Discussion: How do you put your money on autopilot? What’s your system? Let us know in a comment.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. No matter what system you use it must be adhered to. I think getting lazy is the biggest culprit in failing.

  2. Sounds wonderful, I think I might give this a try… it will definitely alleviate some stress!

  3. I have all bills automatically charged to my rewards credit card. The nice thing is that I only have to remeber to pay 1 bill every month to cover all of my expenses. The other up side is that it allows me to float the payment until the end of the month when I get paid, which is nice because I have some bills hit on the 1st, some on the 15th, and some on the 30th of every month.

  4. I think the answer to both temptation and laziness is decision. There’s a wonderful quote by Jim Rohn on discipline: An immediate reward for the lack of discipline is a day at the beach. The future reward for discipline is owning the beach.

  5. I am ALL for automating finances, but I use a two checking account approach. I split my direct deposit between two checking accounts—one for bills and the other for spending. (I don’t use credit cards). At the end of the month, whatever’s left the “spending account” I xfer to savings.

  6. Sometimes the things I have on “auto-pilot” are the only things I do right. sigh*

  7. I like autopiloting what I can for the simple reason is that it makes everything, well, simple.

  8. Best series post so far. I couldn’t agree more. (Plus, less mail / junk waste!)

  9. Christina says:

    I’m about to make most of you feel wonderful right now lol…My husband and I are “failing at life” right now. We have zero savings (he has a teeny 401k, i have a teeny 403b); several maxed out credit cards; student loans that I keep deferring because we can’t afford to pay; and a $2450 mortgage. We’ve cut everything extra out of our lives (no netflix, no baby gym for the baby, no gym memberships, no subscriptions, etc) and have stopped eating out pretty much all together (I saw we were spending close to $300/month on fast food/restaurants and another $300/month on groceries). STILL we are overdrawn several times/month. I MUST figure out what to do or we will lose our home within the next year. So, my question is…:)

    When I set up the autopilot for savings…should I still be looking to save up our buffer if we’re not even making our monthly budget?

    If so…in the “pay yourself first” section, you said:

    “If you’re still working on your emergency fund, put this money towards that.
    If you’re in high-interest consumer debt, put this money in an account that automatically makes extra payments on your debt each month.”

    Should I do both simultaneously…or first the emergency fund suggestion and THEN the extra debt payment suggestion or vice versa? Thanks for all of your teaching, Dave!!

    • Get the buffer first, overdrafts will eat you alive.

      For most parts of the country that $2450 mortage is huge, I don’t know your situation, but getting out of that house may be necessary.

      • We live in Highland, CA. It’s a few hundred/month extra because of Mello-Roos (sp?). I have contemplated looking for a renter…homes in our HOA rent up to $2200/month for a house similar in size to ours. If we got a renter, we could find a much more economical living situation for a while and save $1000/month. I know with our FHA loan we are required to own the house for 3 years…

    • 1. First off you have to increase your income somehow, part time jobs.
      2. Stop using credit cards and cut them up.
      3. Put % wise only up to the match in 401k and 403B for the time being.
      4. Take lunch to work and no extras for a while.
      5. Sell your cars if you have a car payment, and buy good used cars with cash.
      These steps shoud increase cash flow and help you out if you can not sell your home.

  10. Mark – this is basic but really excellent content in an easy to understand format – keep it up! The only major area I think you’ve left out in the distribution of income is giving.

    Money and the panacea it presents itself as is insidious – the pursuit of it can really corrupt deeper priorities. I believe the best antidote is regularly giving some of it away – even at times when we have very little. It’s a excellent reminder that there are always others worse off than us in the world. It also plants good seeds – whether you’re following a faith ethic, or just believe that “what goes around comes around”. I guess what I’m saying is we should regularly give not just because it’s the right thing to do, but because it makes good financial sense as well (beyond just the charitable receipt).

  11. Mac Hildebrand says:

    I will definitely profit from the pay yourself first advice. I’m at a time where I’m trying to save as much as possible, and I’ve been keeping it all in a checking account. Setting up the savings account makes sense to get the most back on the savings. And putting the savings in right at each paycheck will stop me from the temptation to indulge in it. Thanks for the advice.

  12. Pay yourself first is my mantra for 2012, despite my (shrinking) credit card debt.

    Auto payments make me all sorts of nervous though. It’s great for my savings that are predictable every month, but apart from the rent and car payment everything else is variable. I want to know the amount and click the payment myself so I feel like I’m telling my money where to go rather than it auto deducting of its own accord from my bank account. I found the autopilot version of my finances is how I started to lose control and it caused me much more stress. I do appreciate that finance is not “one size fits all” though.

  13. Awesome. I definitely like how you emphasized habits. Just think if it was a habit every morning not to look for the next thing I can spend money on. I think it is huge to setup goals then work towards those goals by incorporating certain financial habits.

  14. Hayley S. says:

    This non-budget idea has really opened my eyes and made me feel relieved. I was trying to fit my budget into tiny little categories and it was making me feel completely constrained. I took you worksheet and integrated it will mind and it reversed my thinking. I was emphasizing my credit pay down and stressing over money for food. With this non-budget method I gave myself the extra money I needed and set a pay off date for the credit card instead of throwing all of my money at all which also allowed me to set up my checking account buffer. I feel better already, thanks for the insight!

  15. Actually this is a really good posting. I find there two advantages of having automated your finances. First, its better for your credit. If you have problems paying your bill on time, or are traveling, automating your finances can make it easy and fast to pay your bills.

    The second major advantage is that it essentially gives work of doing finances to someone else – this is good because if frees up time for other more important tasks, like planning or researching your next investments.

    Thanks again!

    James

  16. I have all of my bills that I can automatically charged to my Advantage Rewards credit card (American airlines) with Citibank and Southwest airlines. These are bills I have to pay anyways so why not get miles or points. Plus charge all day to day expenses too to gain more miles. Then I get to fly for a very low cost ~ ranging from $5 to $ 20… So my bills and day to day expenses allow myself and family take some pretty awesome vacations. So my motto is make my bills work for me…instead of working for my bills without a reward. But very important rule…always pay your credit card balance balance in full, otherwise you will end up in the vicious cycle of paying interest!

  17. I love the idea of having an automatic bill pay set-up with my rewards credit card, but is there any way to pay with my credit card for bills requiring a check? For example, monthly rent… I wouldn’t mind getting rewarded for that chunk of change, instead of cutting a check from my debit account every month.

  18. I think automation will give most people a leg up above many others including yourself from touching and depleteing you’re hard earned money.

  19. I am going to be the lone voice of disagreement here. I agree using auto-pay is a great feature of modern banking; and we use it for every bill that allows it.

    However, how are you going to manage your spending on things like groceries, entertainment, clothing, etc? Changing your mindset alone is not the solution, at least for my family. It doesn’t work to set aside say $20/month for clothing, when we need to get our daughter a winter hat/coat/new car seat/etc – there are expenses we have to make that will cost more than our budgeted amount. There is no way around it.

    There has to be some sort of monitoring system of your spending. Any ideas?

  20. I have been using this method for years and I love it!!

    My one BIG question…. Has anyone figured out a way to charge their monthly mortgage payment to their rewards credit card??? I would love to gain that many points a month for paying THAT bill!

  21. Very great insights here. I personally no longer use a budget and it is what works for my family. The main thing that I would attribute to my success is discipline and as you mentioned a system. All around great advice, thanks for sharing!

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