Today it is easier than ever before to set up automatic payments. I suspect our grandparents would be jealous to know all the many options we have to simplify the process of paying our bills. For those who struggle with organizing their finances, automation is a welcomed bit of technology.
Still, just because automatic payments are easy doesn’t mean they are always the best thing to do. There are both advantages and disadvantages.
Disadvantages of Automatic Payments
1. You Might Set it and Forget it
While the ability to set it and forget it might also be one of the advantages of automatic payments, it is also one of the biggest disadvantages. There are some elements of our personal finances we don’t want to forget.
Take your credit card bill, as an example. Each month you should want to be shocked by how much money you spent. That shock will cause you to go back and review your bill. This manual credit card bill review is especially important for people who don’t keep a budget. You must be in touch with where your money is going.
Furthermore, reviewing and then authorizing your payments helps you to be sure there aren’t any inactive subscriptions on your account.
While it is possible to have automatic payments set up and review all your bills, usually people just don’t worry about doing anything with the bill because the automatic payment is set up.
2. Potential Cost of Unusual Activity
Imagine that you have an automatic payment set up on your auto insurance, a credit card, and a utility bill.
However, one month you make an extremely large purchase and forget to transfer funds to your bank account. Before you know it, you’re now facing a bank overdraft and insufficient funds possibly on one bill or on multiple bills.
3. Scheduling Conflicts
Similar to the potential cost of unusual activity, at times several of your payments might post close to each other, and you forget to allocate enough funds to your account.
The obvious remedy, and the one I use, for these disadvantages is that I keep a larger than normal amount of money in my checking account to be sure I won’t overdraft my account even if something unusual happens.
Advantages of Automatic Payments
1. Set it and Forget it
Yes, this was the first disadvantage too. When it comes to things like investing, it is better if you don’t even miss the money. When you set up an automatic withdrawal schedule, you’re less likely to be cognizant of how much money you are investing for retirement. This detachment is a very valuable tool to help you grow your nest egg.
2. Save Time
Once you set up an automatic payment, you don’t need to invest any more time to be sure that your financial tasks are complete. Everything is now automated so you can move on to other things.
3. Avoid Possible Late Fees and Stress
If you’ve ever forgotten to pay a bill then you know how frustrated you feel. However, you can avoid the potential late fees and the stress by setting up an automatic payment plan.
How to Decide What to Automate
As a general rule, I’d suggest automating anything that helps your finances – like investing. If it is costing you money, you might want to consider an alternative to automation. Personally, I prefer to set up automatic payments to a credit card instead of a bank account because once all the bills for the month come together, I have 15 days (or whatever I set) to be sure my bank account has enough to cover the bill.
Obviously, this is very poor advice for those with credit card debt problems. When you set up automatic bank payments, those funds are automatically removed from your account, so that could potentially catch you off guard.
Do you automate your payments? What do you think about automatic payments? Leave a comment!
Photo by Randy Pertiet