My Honda Civic has an option for cruise control. Unfortunately, most of my driving currently takes place on the New Jersey Turnpike and local highways during rush hour and construction, so I rarely have an opportunity to activate this feature. In the slim occasion I find myself driving on a deserted country road, I activate the cruise control and sit back, letting the car’s computer maintain my speed. I like to imagine cruise control is an auto-pilot device, so I can relax, close my eyes, and wake upon arrival.
If you’ve ever driven with cruise control, you’ll know it is not the same as auto-pilot. You have to be vigilant and aware of your surroundings, even if you’re not keeping your foot on the accelerator pedal. I have the same concerns with the topic of automating finances.
Making your finances automatic is a great way to put your savings into overdrive. I take advantage of technology’s ability to automate in a number of ways:
- My paycheck is directly deposited into my bank account every pay period.
- Several of my bills, as many as possible, are paid automatically and in full every month with the appropriate credit card.
- My credit cards are paid in full every month without me writing one check or clicking one button.
- A number of savings transfers and investments are programmed to occur at the same time every month, again with no intervention.
I would like to say that these features of automation have effectively put my finances on auto-pilot. It is true that I am now free to use the time I would have otherwise spent paying bills and depositing paychecks for other, possibly more worthwhile tasks. I am hesitant to call this system an “auto-pilot,” however. Like driving, I am still in charge and my brain needs to be engaged. If I stop paying attention, the likelihood of a crash increases.
I primarily use three credit cards, two for personal use and one for business use. Despite the cards’ close proximity in my wallet, their cycles have not converged. The payments are due at different times of the month. My checking accounts are debited automatically, so I need to ensure I have enough money in the appropriate accounts at the appropriate times to avoid an overdraft fee. The automation doesn’t permit me to to “set it and forget it.”
The same is true with my bills. I mentioned I drive on the New Jersey Turnpike every day. That’s an expensive commute. I use the E-ZPass system to make the drive go quicker and receive a discount on tolls, but this kind of automation lowers my sensitivity to increasing tolls. Since I’m not stopping at the booth and handing out cash, I don’t see that money leaving my wallet. I look at my quarterly statements from E-ZPass, but with 65 weekdays of toll charges, plus some on weekends, it’s easy to let the increases stay buried in my mind.
I’ve begun to offset the toll increases by opting non-toll roads occasionally but with more traffic lights on these alternate routes, I would have to wonder whether the extra fuel expense negates the savings in tolls.
Even though my utility bills like electricity, cable and telephone, as well as my credit cards, are paid automatically each month, I am sure to review the statement or transactions. It’s tempting to let cruise control handle everything. I mentioned that it’s important to ensure money is in the accounts prior to the automated withdrawals, but more attention is necessary. Reviewing statements and transactions is necessary to catch mistakes.
Mistakes can be on the company’s part or on the consumer’s; at least once I’ve forgotten to cancel a “free for the first month” service and was rewarded with a charge on my credit card. I would have remained ignorant of the charge if I didn’t review the statements and download my transactions into Quicken. And I have also experienced a number of mistakes, such as the cable company charging me for a service they didn’t provide.
Companies are quick to encourage automation because they know a certain percentage of consumers will let “mistakes” slip. That’s a statistic I don’t want to be.
What part of your finances is tackled automatically, and are you on auto-pilot or cruise control? Have you ever encountered mistakes you would have missed if you weren’t paying attention?
Photo credit: mhalon
If you’ve ever run from one point to another, you’re probably aware that there is a limit to your speed. With “analog” equipment like the bones, muscles, joints and tendons in your legs and feet, there are physical limitations that prevent you from going too fast. Don’t worry. Thanks to recent inventions, it’s quite easy to get around this problem. Bicycles and cars allow your muscles to exert much less effort while resulting in faster movement. Sometimes machines and computers are required to break through limitations.
As you might imagine, saving money follows the same concepts. Picking up your paycheck from your mailbox, endorsing the back, and bringing it to your bank is like walking from one point to another. (Even if you drive to the bank, for the purpose of this metaphor, you’re a walker.) Once the teller confirms your identity and the validity of the check, he or she might give you the sum of the check in cash. Perhaps you cash only a portion of your check — the money you’ll need for the upcoming week — and deposit the rest into your checking or savings account at the bank. Congratulations, you’re now moving at 25 miles per hour.
You’ll still need better equipment to make the jump to hyperspace.
3. Automate Your Savings. With your savings on autopilot, you have less to worry about. While you’re not looking, money is transferred to your bank account — a high-yield savings account is best but a checking account may be a necessary intermediary — and begins earning interest. There is no need to waste gasoline on trips to the bank. There are several parts to automating your savings.
Direct Deposit
Direct Deposit is one of the most positive developments in saving. Rather than cashing your pay check and depositing only what is left over, you can instruct your employer to transfer your after tax salary each payday directly into your checking or savings account. Large companies usually make this an option when you first accept the job. Otherwise, you may need to get in touch with your human resources department. Smaller companies may not offer this feature, but it wouldn’t hurt to suggest to those whose make these decision that the company implement the service.
There are a number of benefits. Most immediately, you don’t have to worry about finding time for traveling to your bank. You reduce the risk of losing your paycheck in transit. In most cases when you receive your funds via Direct Deposit, the money is made available to you on the date the check is deposited rather than being subject to a holding period as you would be for other deposits. Direct Deposit also allows you to split your paycheck among a number of accounts, so you can immediately designate a portion for savings and begin earning interest on the day of deposit.
What are the drawbacks of Direct Deposit? If you still use cash for transactions throughout the week, you’ll need a way to get the cash out of the bank. These withdrawals should be done from checking accounts rather than savings accounts. Savings accounts are limited to six withdrawals or outgoing transfers per month — so most of your transactions should take place in a checking account. You can use an ATM card to get the cash you need. You should be the last entity to touch your money — let the interbank technology take care of as much of these transactions as possible.
Automatic Transfers
In most cases, your paycheck is best deposited into a checking account, and from there, you can set up automatic transfers into savings and cash withdrawals. The best high-yield savings accounts can be linked to your checking account. This will let you transfer money directly within the same bank or from one bank to another without writing checks. For example, if you choose to open accounts at ING Direct, you could set up a link to your local checking account into which your paycheck is Directly Deposited.
You can then create automatic savings plans, instructions to periodically transfer money from your checking account to the high-interest savings account. Set it and forget it. While I am citing ING Direct as an example, they are not the only bank that allows customers to create automatic periodic deposits. Find a bank you like and review the options they offer.
With all your money moving behind the scenes, from your employer to your checking account to your savings, you are earning interest without knowing it. When the money is not passing through your hands, there’s less temptation to spend it right away. More money ends up in your savings, accruing interest for the future. Effectively, each time you feel you need cash, there is an obstacle of going to the bank or ATM. Some may decide that the expense is not worth the hassle and simply leave the money in savings.
Automation allows more of your money to find its way to your savings account quicker and remain there, earning interest.
Image credit: PPDIGITAL
Employees who do not specifically choose to do anything with the retirement plans offered by their employer are being targeted by the Labor Department. Under new rules, individuals who do not make their own choice will be automatically placed into 401(k) plans in which their investments will be allocated in a mix of stocks and bonds, theoretically pertaining to their intended retirement horizon.
Not only are new employees targeted, but the Labor Department is also looking to automatically enroll employees who are simply not taking advantage of their companies’ retirement plans.
Many companies who auto-enroll their employees create a portfolio containing only money market funds or other investments designed for safe capital preservation rather that long-term growth.
There are some benefits to these new rules:
* There is a good chance that the average employee who doesn’t pay attention to their retirement plan will be better off at retirement.
* More investment in stocks will be good for everyone all ready invested in the stock market.
* Studies show (according to the New York Times) that the fewer choices left for the employee, the better the investment results.
* More investments mean those who manage those investments will still have jobs.
I can think of some related down sides:
* More investments, especially in stocks, means more fees paid by investors, many of which may be hidden.
* Employees with no investment experience may be better off in plans that resemble traditional pensions.
* There is a distinct possibility of losing money if the stock market performs poorly in the next few decades.
I’ve been staying away from the “lifecycle funds” or “target retirement funds” that seem to be the favored approach to automatic investments for a few reasons. I could pick a retirement date, but I’ll more than likely be incorrect. It’s hard to say whether I’ll be retiring early, on time, or late. My career path isn’t as clear as some other people’s. Also, it’s easier to hide layers of fees in these “funds of funds.” Each layer of fund adds diversification, but also adds more distance between the investor and the underlying companies.
For now, I’m creating my own mix of mostly stock funds in my 401(k). I’ll write more about my personal asset allocation in the future.
In Search of Savers: 401(k) Rules Are Changing [NY Times]
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