Automating Your Personal Finances Cuts Both Ways
Automation is one of those concepts that can significantly improve your financial situation. This same power also has the potential to make things worse.
The power behind automating your personal finances is that it requires very little effort. After initial setup, the process happens automatically with little or no extra effort required. Saving through a company-sponsored 401(k) plan is one such example. After setting up your contribution and investment choices, money is automatically withdrawn from your paycheck without you having to do any additional work. You should periodically monitor your investment choices, but the process of saving has been taken out of your hands. Many automated finance topics, including 401(k) contributions, were covered in the bestselling book, The Automatic Millionaire, by David Bach.
While that book made a compelling case for automating your finances, you should be careful not to automate bad financial habits as well. A classic example of this is the gym membership that automatically drafts your membership fees from your checking account each month. I know that I would have cancelled my membership much sooner if I had to drive to the gym each month and hand over cash. That would have been much more painful and made me realize that the only reason I ever went to the gym was to pay for a membership I never used. Since the process was automated, I hung on much longer before canceling. Having other bills paid automatically can save time, but should only be done for expenses you definitely would have chosen to continue paying anyway.
The truth is that automating your finances is simply a way to get around your own laziness. It works well because once the initial setup is done, additional effort would be required to cancel the process. All things being equal, most of us choose inaction over action. To make the most of automating your finances, try to use it for as many savings and as few spending methods as possible.
Which expenses have you automated?
Monday, December 29th, 2008 at 8:50 am