Devil’s advocate: Automating your finances is a mistake
Auto-pay can make you lazy, and that can lead to costly errors.
The allure of automation is obvious. Look at the famous Ronco Rotisserie catchphrase -- “Set it and forget it!” Automation is appealing because it lets computers do the work and lets you do something else more interesting.
Set your 401k contribution each month, set the allocation, and then go spend time with your family. Set credit cards on auto-pay, go all electronic for the statement credit and for the environment, and spend more time playing video games and watching television.
I get it and I love automation too, but there’s something you should know: Automating your finances can lead to bad habits, and bad habits can lead to tragic losses. In this Devil’s Advocate post, I explain why automating all of your finances can be an expensive mistake.
Automation makes you lazy. Every working adult who contributes to an employer defined-contribution plan, like a 401k, has automation in his or her life. You pick a percentage of your salary to contribute toward your retirement and then you let it do its work. You focus on doing a great job, landing the next promotion, and securing clients while computers make sure you contribute each month toward the future.
It makes you lazy because that’s where many people’s involvement with their 401k ends.
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They don’t rebalance, they don’t review their investments with their goals in mind, and react only when something crazy happens -- like the start of the recession last year. Near-retirees discover that their allocations are far too heavy in stocks and now they can’t retire on time. Young professionals panic as their balances crumble, not realizing that they are 40 years away from touching the money, and that the drop in the stock market actually helps them in the long run because they can buy stocks on the cheap.
Automation has the potential of making you lazy and you may reaction emotionally, rather than strategically.
Out of sight, out of mind. Actually, the idea of regularly contributing to your 401k is very powerful because in that case, laziness is in your best interest. If you forget that you are contributing to your 401k each month, there’s very little downside. If, however, you set up automatic transfers from your bank account to a high-yield savings account, there can be consequences.
Let’s say you regularly transfer $100 each month from your checking account to an ING Direct savings account. The $100 goes to a savings account earmarked for your first home. It’s a great idea and I fully support it. You also learn that this year you’ll be getting a $200 bonus. Hooray! That’s great news. Congratulations!
So you log in to your checking account and see that you have $500 in there, and you set up a transfer of $400, figuring the extra was just accumulated savings over the last few months. Then the automatic transfer happens, and your balance is now $0. You get dinged with minimum-balance fees or maybe you use your debit card. Zing! Insufficient funds.
Automating your savings is a good idea, but you have to stay diligent and remember you’re doing it, or you could shoot yourself in the foot.
Risks of auto-pay. More and more companies are now offering auto-pay, where your bill is automatically paid in full with a credit card or bank account. In theory, it’s a great feature because you would certainly be paying many of these bills in full (utilities, cable, water, etc.) but there are several huge risks to be aware of:
- You forget. The whole argument of “out of sight, out of mind” from above holds true again. You forget that you made a big purchase this month on your credit card, you intended to transfer money out of savings, but the auto-pay was early and you got dinged.
- Once you pay, your ability to dispute fraud is diminished. Earlier this year I read a story about a retiree who became the victim of credit card fraud. Normally this isn’t a news story because your liability for credit card fraud is limited to $50 by federal law and most companies offer $0 fraud liability. The wrinkle in his case was that he auto-paid the bill without reviewing it beforehand, and so he implicitly agreed to all the charges. I don’t know the end result of that story but it certainly involved headache.
- Unexpectedly large charges, fraud or otherwise, really mess up your week. There’s the risk that you forget about the auto-pay, which is kind of your fault, and then there’s the risk that an error or fraud starts a cascading series of fees. Maybe your energy bill spikes because your water heater fails or there’s a billing error on your cell phone that racks up a $10,000 bill. If you auto-pay, you may be out a lot of money for a long time while various companies “investigate.”
Automating your finances can be great if you’re able to keep on top of it. If you’re doing it to unload some of the work, such as not having to review your statement or log in to click “schedule payment,” you might want to do yourself a favor and keep some of those tasks on the manual list. Automation works great for things that have no dependencies, such as 401k contributions, but for everything else, consider doing it manually (especially if doing it requires only a few mouse clicks).
What are your thoughts on automation? Where does it make sense and where could it introduce headaches? Are there things you do to mitigate the risks of automation in some aspects of your personal finances?
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