Why automatic payments (almost) always make sense

Automatic deductions are smart when paying yourself but less so when paying your credit card bill

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From the February/March 2016 issue of the magazine.

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I occasionally go to the gym. I don’t go regularly, I don’t go consistently and I certainly don’t go automatically. It’s not that I don’t like going to the gym; but, like everyone else’s, my life is busy and my schedule constantly changing. It seems there is always something more pressing that has to get done first. It would be so much easier if I could just transport myself there, Star Trek–style, and then be transported back home once I am finished. It would also be helpful if the transporter could return me from the gym at the precise moment I left, therefore ensuring that my workout consumes none of my valuable time.

Fortunately, unlike my fitness dilemma, there are options available to help us automate our personal finances. From regular paycheque withdrawals to online billing, you can largely set your financial life on autopilot. But is that always the best choice? It depends largely on whether you are saving or paying. Let’s take a look.

The most effective way for most of us to save for our futures is to arrange for a pre-determined amount of money to be automatically transferred into a separate account every time we get paid. Depending on what you’re saving for, that money could be transferred into a registered product like a Tax-Free Savings Account (TFSA), a Registered Retirement Savings Account (RRSP), or even into a savings account for shorter term goals like saving for a car. In order for this to work, the saving has to be automatic and it’s best if that automation happens on payday. That way, you are “forcing yourself” to save for your future before you’ve even had a chance to miss the money or more importantly, to spend it. Automatic contributions mean you never miss them. And once set up, they take up none of your time.

Financial experts have long heralded the virtue of “paying yourself first” for one simple but incredibly powerful reason: It works when, frankly, little else does. Very few people, outside of Jedis, Buddhist Monks and Vulcans, have the self-discipline required to be able to put money away consistently without automating the process. However, once an automatic savings plan is established, people are often shocked to discover how little they miss the money they are now saving. There are examples of people who missed the money so little they completely forgot about their biweekly contributions until they received a statement from their bank showing the thousands of dollars they had accumulated.

One trick to help you save more is to take advantage whenever you get an increase in your income or when you have a decrease in your expenses. For example, if you get a raise at work that nets you a $40 bump in your weekly pay, why not increase your automatic savings contribution amount by $20, and buy yourself something frilly with the difference? If you previously spent $60 a week on gasoline but now find you’re paying $45 because of the drop in gas prices, why not invest the savings? Combining those two ideas would net you an additional $35 a week, which could generate more than $85,000 in savings over 25 years.

While automating savings is an idea to be embraced, you probably shouldn’t be quite as enthusiastic about paying your bills this way. Direct withdrawal of your household bills is certainly convenient but it also makes it considerably less likely that you will review those bills carefully for any unwarranted charges or for any opportunities to reduce them.

Automated payments also make it more difficult to notice any sunken cost expenses—that is, situations where you continue to pay for something you no longer need or use, such as that membership at the gym you signed up for last January but haven’t stepped foot in since April. As well, some organizations, like insurance companies, offer substantial discounts to customers who pay upfront and in full so why not take advantage of those savings and skip the payment program altogether?

As always, common sense applies: Your mortgage payment should continue to be automated, your credit card bill . . . not so much. In fact, when paying your credit card bill each month, be sure you’re not the one automating the process by hitting submit before carefully reading the statement. Mistakes happen and, unfortunately, so does fraud and you need to be vigilant against both. I once found a charge of $314 on my credit card statement for a purchase of $31.40. When I contacted the retailer, they assured me it was a mistake and it was corrected immediately. Another time, I discovered I had been charged twice for the same purchase. I’ll never know for sure whether or not either incident was truly an error or something more insidious, but I do know that I’m glad I checked my statement.

Ultimately, putting your finances on cruise control has some fantastic advantages: ease of execution, minimal pain and excellent long-term results. But before you check the box marked “automatic deductions,” be sure it’s truly in your best interest. Now if someone would just transport me to the gym that easily, I would sincerely appreciate it. Energize.

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