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Sunday, September 4, 2016

Automate Your Finances in These 5 Areas

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You already work hard enough making your money. So give yourself a break when it comes time to pay your debts, recurring monthly bills, savings, and retirement accounts. Who wants to keep track of all that? Automate your finances so you can set it and forget it.
Here’s a rundown of everything you can automate, along with the pros and cons of this strategy.

Pros

  • Never forget a payment. Avoid late fees, disrupted service, and hits to your credit score.
  • Set automated payments for any amount you choose. This really comes in handy for paying down big balances and building up savings.
  • Take the decision-making out of how much you pay every month. In this way, autopay keeps your financial goals in check.

Cons

  • It’s easy to forget auto payments are scheduled. If you haven’t left enough money in the bank to cover them, then that could mean insufficient funds fees, overdraft fees, late fees, and, in some cases, interrupted service.
  • You’re stuck with whatever payment amount you set up. Certainly you can make arrangements to change it, but that takes time. If you don’t realize until today that you can’t cover the payment scheduled for tomorrow, you’re out of luck.

Student loans

Automating student loans comes with a pro all its own: Most student loan servicers offer a .25 percent interest rate reduction for setting up autopay. You can set the recurring payment for the minimum monthly amount due or a higher amount if you are trying to pay off your student loans early.
Of course, if you want to pay your student loans off faster, you may not have the same amount to put toward the debt every month. In that case, set it to the minimum and then just send in extra cash as a separate payment. Just remember not to include your minimum payment in the extra payment, as that is already going to come out automatically, no matter what.
For instance, let’s say you have the automated payment set for the minimum amount of $300, and you want to pay an extra $100 this month. If you manually send $400, it’s not going to prevent the $300 from coming out automatically.

Credit cards

Though your credit card balances may vary from month to month, that’s no reason not to automate your finances on this front, too. When you set up automated payments through your credit card issuer, you can choose to pay the minimum amount due every month or the full balance.
Alternatively, if you’re paying down a high balance — and want to pay more than the minimum, but not the full balance — you can specify a set monthly amount.
There are a couple of scenarios in which you could run into trouble:
  • You charge a big purchase to your credit card and have the recurring payment set to the full balance. That could do some damage to your bank account if you weren’t prepared to pay off that charge right away.
  • You have a high balance on your credit card that you’re paying down with a set monthly amount, but you’re still using that card, too. A big enough charge to the card could push the minimum amount due higher than the amount you have scheduled.
One solution is setting your autopay to the monthly minimum, then manually paying any extra — either to pay off the full balance or to pay down a high balance. Worst case scenario, you forget to pay the extra, but you’ll never miss the payment entirely.
The best solution, though, is never charging more to your credit cards than you can afford to pay off by the due date. Stick to that rule and you can set it to pay the full balance without worry.

Utilities and other bills

How many bills do you pay every month just to keep your household running? It may be half a dozen or more, all with different due dates that you can’t afford to forget. Fortunately, pretty much any bill you pay on a monthly basis can be automated these days:
  • Phone
  • Internet
  • Cable
  • Electric
  • Gas
  • Water
  • Trash
Be careful, though, about which payment option you choose. Only have these bills charged to a credit card if you are committed to paying your balance in full every month — the last thing you need to do is pay interest on your phone bill. Consider playing it safe and having bills like these come directly out of your checking account.
Visit the company’s website for details on setting up autopay. If you don’t find any information on the site, give them a call. If the company doesn’t offer such an option, you’re not out of luck. You can always look into setting up bill pay through your bank.

Savings

Up until now, we’ve been talking about bills for which there are consequences if you miss payments, like late fees and interrupted service. That’s not the case for savings, but that lack of urgency is the very reason you should set it and forget it.
When you manually contribute to your savings account, you give yourself an opportunity every single month to change your mind. But when you automate your savings, it takes a few extra steps to prevent that contribution from being deposited. Sure, you could dip into it if you wanted, but once it’s there it’s a tougher sell to spend it instead.

Retirement contributions

401(k)
You may already be entered into automatic retirement contributions to your 401(k) through your employer. Just keep in mind that, unless you specified otherwise, you are having the default amount deducted from your paycheck.
The default is usually around 3 percent. While that is better than nothing, it’s worth checking in each year to see if you can afford to contribute more. And remember, you’re limited to how much you can contribute every year. The 2016 401(k) contribution limits are $18,000 if you are under 50 and  $24,000 if you are 50 or over.
Contact your employer’s human resources department to make changes to your 401(k) contributions.
IRA
If you are self-employed, look into an IRA (Individual Retirement Account) as a way to automate your finances. As with the 401(k), revisit your contributions at least once a year and ensure it still makes sense for your financial situation.
Of course, IRAs come with contribution limits as well — much smaller, in fact, than those of the 401(k). The 2016 IRA contribution limits are $5,500 if you are under 50 and $6,500 if you are 50 or over.
By the way, you don’t have to be self-employed to contribute to an IRA; they can be a good supplement if you max out your 401(k) contributions.

Automate your finances, but don’t ignore your payments

Mistakes get made and when it comes to your bills, you need to catch them right away.
Pick a day every month to check all of your statements, just to be sure your payments are being made on time and for the right amounts. You can set and forget your payments, but when you automate your finances, remember to follow up.

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