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The Benefits, and Some Major Limitations, of Financial Automation

This past weekend, I looked outside from the comfort of our home and took in a wonderful sight: Our boys mowing the lawn. It was a beautiful thing to see a chore I used to do being done by others. 

Much the same can be said for some forms of financial automation.

A one-time decision

Saving money is a lot like going to the dentist. You know you should, but it’s not a lot of fun. What can take the sting out of saving is putting it on auto-pilot. 

If you need to make the decision to save every time you get paid, chances are you won’t. There are so many other uses of your hard-earned money. There are so many things you need to spend money on, and so many others you’d like to spend money on. But if you need to make the decision to save just once—the day you set up an automatic transfer from your checking account to your savings account, or from your paycheck to your retirement account—that’s much more doable.

This is one form of financial automation I use. Every paycheck, the maximum amount I’m allowed to contribute to my employer’s 401(k) plan goes into that account. I didn’t start out at the maximum, but over time, my wife and I chose to increase the amount.

Other forms of financial automation

There are a lot of places in your financial life where you could use financial automation. I especially recommend it for saving and investing. You could also pay many bills automatically, such as your mortgage, utility bills, and more. Some companies may even give you a financial incentive for setting things up on auto-pay. We’ve chosen to pay our Sprint cell-phone bill automatically because of that. But be forewarned. There can be a downside to financial automation as well.

When it may NOT pay to automate

Automation has become very common within 401(k) and other types of employer-based retirement plans. It used to be that when you joined a company you had to opt in to the retirement plan. Now it’s much more the norm that you are automatically part of the plan. If you don’t want to participate, you have to take steps to opt out. And that’s been a good thing. Participation rates have increased as a result of the change.

But here’s the downside. The percentage of your salary that is automatically transferred to the retirement plan is usually set pretty low—too low, in fact, to enable you to save enough for retirement. But very few employees ever increase that amount, perhaps assuming their company knows what’s best. If you’ve been automatically enrolled in your workplace retirement plan, take a few minutes to run some numbers, estimating how much you really should be contributing each month. Then contact your human resources department to make any needed changes.

Another potential downside to automated retirement plans is that they tend to automatically choose what participants invest in—usually a target-date fund. Target-date funds have many benefits, but just be sure you understand how a target-date fund works and see if the stock/bond allocation in the one you’re using is truly right for you.

One other downside to financial automation is that it could prevent you from noticing a price hike in one or more of your monthly bills. I recently wrote about using some of the newfound free time many of us have due to the pandemic to see if any savings could be found in services we each pay for every month. Noticing that our monthly cable bill had just gone up prompted me to look for a better deal. 

What I hadn’t noticed for several months is that one of our streaming services, Sling TV, had increased our rate several months ago. That’s one of the few bills we had set up on auto-pay, which led me to pay less attention to it.

We actually have very few of our monthly bills set up on auto-pay—our cell-phone bill, that Sling TV bill, and our internet bill since that one is locked in at a low $55 per month for five years. I like to be able to check over most bills, looking for changes or possible errors. And clearly, with that Sling TV experience, I’m reminded of the potential downside of financial automation.

What’s been your experience with financial automation? 

Take it to heart: “Now, a person who is put in charge as a manager must be faithful.” – 1 Corinthians 4:2 (NLT)

Take action: If you haven’t done so already, a great first step with financial automation is to set up an automatic monthly transfer from checking to savings and/or automatic contributions to a retirement plan.

Read more: Automating Financial Wisdom 

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