Automating Your Personal Finances is a Mistake| Updated: |
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In the Personal Finance community, many people are advising everybody to automate as much of their personal finances as they can. I am not one of them. I do not automate anything in my personal finances. I do not like automation for my personal finances.
It is a mistake. Automating your personal finances is a lazy excuse for not being rigorous enough to manage them yourself. The worst is the “set it and forget it” advice for automating your personal finances!
I will not deny some advantages to automating some things in your personal finance routines. But I believe there are mostly disadvantages to fully automating your personal finances. Many people will not agree with my point of view. But I hope that will yield some interesting debate!
In this article, I describe the reasons why I do not like money automation. I believe it may be a bad idea for most people to automate their finances. It is a piece of advice that way too many personal finance media give. As you will see in this article, there are many reasons why automating all your finances is bad advice!
What is money automation?
Let’s start at the beginning with what is automating your personal finances all about. It is a way to put your money into automatic control. You can set several automatic recurrent transfers to move money after you receive your income into several different accounts. For instance, you can set up an automatic transfer to your retirement account (a 401(k) or a third pillar). You can also automatically send money to your broker account. And you can also move some money to some savings accounts.
Another thing you can do is automating your bills. You can automatically pay your bills by different means. For some bills, you can also set automatic transfers to another bank account. You also could use direct debit orders where the company can directly withdraw a set amount of money from your account regularly. Or you can use electronic bills to limit the amount of work you have to do to pay each bill.
At first sight, all of this seems great. But we will see in the following sections that there are many reasons why this is not a good idea! I do not like automating any of my finances.
I am only talking about managing your money automatically. I am not talking about managing your investments in an automated fashion.
There are also some forms of automation, such as Robo-advisors to invest your money automatically. But this is not what I am talking about here. I may talk more about it in the future. Robo-Advisors are a good way to avoid the hassle of investing but you will pay some extra fees for that.
Paying yourself first is not efficient
One advice that you see in almost all personal finance blogs is that you should pay yourself first. When you receive your salary, you should directly set aside a certain amount of it and move it to the next account as your savings. Then, you can use the remaining of your money to pay for your bills and maybe use something for you. The advantage of this technique is that you are guaranteed to save this money every month.
However, I believe that this technique brings more disadvantages than advantages. First of all, how do you set that automatic amount? How much savings rate is enough? If you want to retire early, you should save as much as possible. It is challenging to set this amount.
Moreover, it will make you satisfied with a small amount. If you set it to 15%, why can you not save 20%? Or why not 50%? And whatwill you do with the rest of the income? Splurge it all?
You should not be content with a small number. You should save as much as you can! It is a lazy approach! It makes you think you do not need to save more. But if you are serious about reaching financial independence, retiring early, or even about another financial goal like buying a house, you should not be content with a fixed amount. You should try to save all you can!
Another issue is if your salary is not the same each month. What will you do with your yearly bonus? Will you spend it all because it is not automatically sent to your savings? No! Extra income should come as an additional savings opportunity.
And what if you sell some of your stuff, one month? It will give you some extra cash. You should save some of it! The same should apply! And most people will not increase their automatic savings rule if they get a raise. It will result in increased expenses and reduced overall savings rate. They think that they are saving 20% but after several years, it becomes 15% as income increases.
You cannot plan for all the income that you will get. Therefore, you cannot fully automate your personal finance. If you cannot fully and perfectly automate your personal finances, there is no point in doing it!
Automation makes you lose control
Some people will tell you that it is good not to know what is going on, to lose control and let the system do everything. It is the so-called, set it and forget it strategy. But I do not agree. You should be in complete control of your finances. It takes some self-control to do it correctly. But it is worth it to be in full control.
Why? First of all, if you do not know what is going on, you will not realize if some things are wrong. For example, you first set your automation to save 10%. Then you get an increase in your income, and this gets down to 7%. You will not pay attention to the difference. You will simply spend more, thinking you still save 10% of your income. It is dangerous, in my opinion.
It comes back to the fact that it is not efficient. You should save as much as you can, not a fixed arbitrary amount. Some banks allow you to increase the amount over time. But very few banks have this option. And it is not a good criterion to choose a bank.
Another problem is if you are automating the payment of your bills. There are some bills you can safely automate, like your rent and your taxes. There is not a lot you can do to change these bills.
However, by automating all your bills, you are losing sight of what you are spending. If you need to look at a bill each month, you will want to cut it down if it is too high. But if the money is simply removed from your account each, you will not have the will to cut it down. If your credit card bill increases month after month, you will probably not see it early enough.
And finally, you are also likely to forget to cut that automatic payment for something you do not need anymore. I have heard countless times about people forgetting to cancel their automatic payment to a subscription, for instance.
If you move to a new apartment, you will have to change your automatic transfer for your rent from one tenant to another. And you will have to change the amount as well. Many people will do it wrong. On the other hand, if you have simple bills, it is much easier to not pay for what you do not need anymore.
Automating your money may be dangerous
Not only is automating your finances not very efficient and makes you lose control, but it could also be dangerous.
First of all, if you are automating your finances a lot, you will almost not look at your bank accounts. Many people are advocating for a set-and-forget strategy with money automation. But this is incredibly bad advice. If you are the victim of financial fraud, it may take you much longer to find about it. Generally, it is easier to resolve financial fraud if you detect it as fast as possible.
There is another reason why automating your finances may be dangerous. Automating your finances, you have to base everything on your income date. Then what happens if your salary gets one or two days late? All your other payments will start even if you do not have money to pay them. In the best case, nothing happens. But depending on your account, you could end up in negative. It means paying a substantial interest rate on the negative amount. If it is not being paid, you may also not see that it did not go through. That means you risk getting late.
It is often too complicated
If you want to automate all your finances, it will take quite some work.
You need to set up several accounts. Then, you need to set up several automatic transfers between the different accounts. If all your accounts are in the same bank, it is not too bad. But if you need to have accounts in several banks, that is more complicated. You need to remember all your passwords. And if you need to update the amount of one of the transactions, you need to remember the procedure for it.
That also means you should choose a bank offering enough automation features. It is not a good criterion for selecting a bank, in my opinion. Today, the best criteria to choose a bank are the low fees and the interests offered.
Automation binds you to a bank
Finally, another big problem with too much money automation is that it will bind you to a bank.
If you have several automatic transfers set in your bank, you will have spent some time to set them up. That means that every time you change to a new bank, you will have to restart once again. You may also have some electronic bills automatically set up. And these electronic bills may not be transferable to a new bank. The same applies if you have direct debits taken from your account.
All these things will make you reluctant to change bank accounts. It will make it more challenging to switch to a new bank account. And even if you can save money by switching to a new bank, you may not do it because you do not want to restart your automation over again. It is not good!
Recently, I had to change my bank account, and the few automation I had in place made it more difficult. I already did not automate before. I only had a few electronic bills and a few direct debit orders. But now I want to avoid all forms of automating my personal finances. I want to be able to change to a new bank as smoothly as possible.
As you can see, I am a bit adamant against automating your money. For me, it is just plain lazy. And it makes it too easy to forget about your personal finances. I do not think it will be a good thing in the long-term. Paying yourself first always sounds like a good idea at first. But if you have serious goals, it is not enough. You need to save than that small amount you selected for paying yourself first.
I believe the downsides of too much automation far outweigh the advantages. Your money is something that you should not be lazy about. You should be in full control of your finances.
Everybody should have the self-control necessary not to need any money automation. You just need to be rigorous about it. I do not think it is that difficult. If you are serious about meeting your financial goals, you should be serious about managing your money yourself.
You could do a little bit automating if you want to save some time. But you should make sure that you think about all the disadvantages before you do that! For each money automation step that you want to take, you need to weigh the pros and the cons. If you are not able to restrain yourself from spending all you have, money automation is probably not too bad. But you should focus on learning self-control. It will be a very useful skill!
Automating your finances is not a set and forget strategy! Even if you are automating your finances, you should keep a good look over your personal finances. You should check all your accounts regularly. And you should make sure that there are no mistakes. It is also an excellent time to verify that you do not pay for something you do not use or spend too much on something.
As a last note, it is not because I am advising not to automate your finances that I am recommending investing in individual stocks or using a financial advisor! I personally use index investing. I do not think this has anything to do with automation. Index investing is a great thing! And most financial advisors should be avoided. And you can often do a better (and much cheaper) jobs than Robo-Advisors. But they are probably much cheaper than human advisors.
If you want to learn more about how I manage my finances, you can read about my Monthly Personal Finance Routine.
What do you think about automating your finances? Do you do automate your personal finances?
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22 thoughts on “Automating Your Personal Finances is a Mistake”
I see where you’re coming from, but I think the automating of bills and rent transfers etc has more advantages than disadvantages. You avoid needless waste of paper first of all, but also avoid having to log in constantly logging into your bank account to fill out transfer requests.
All you have to do is log on to your bank account at least once a month and check the bills were paid, credit card statements make sense with no weird charges that you need to dispute etc.
You can always elect to save more or less each month depending on your situation. I think if you are automating everything and then taking a completely hands off approach to all of your finances from that point onwards, then it’s not good, but I’m not sure that is a direct result of automating some of your finances, it’s a result of your lack of interest in your finances in general.
If you are interested in your finances and in your savings, you will always adjust as needed to optimise the situation, and be thankful for the time that automation does save you.
Just my opinion, but your ideas are certainly valid and a good talking point. I am enjoying your content, and have used some of your referral codes. Well done :)
I still get most of my bills by email and only log-in to my bank account once a month :)
But it’s true that you could automate much and keep a good hand on your finances.
I know that many people prefer to automate and you can indeed save time. But most people overestimate how much time it takes to pay bills and check accounts.
Thanks for having used my codes :)
It is a good, thought provoking article. Whilst I don’t fully believe in automating finances, I do believe there is some merit to it. I believe in a hybrid model (similar to what rdtradecraft suggested)
Let’s tackle each of the aspects in turn: savings and expenses
My approach is as follows: pay yourself first, this sets the minimum savings amount and then from the remaining amount, try and save as much as you can.
If your circumstances change then you need to update your automated savings.
For one-offs e.g. bonus, extra income, you need a manual override.
You need to track every single expense. This will stop you from “forgetting” about that gym membership or subscription etc.
Certain expenses can and should be automised e.g. rent, billag etc.
For the remaining expenses such as internet, health insurance etc these can be automated provided there are checks and balances in place such as 1) ebill approval is set at expected amount so excessive bill is reviewed; 2) periodic (monthly, quarterly or yearly) review for the relevant expenses.; 3) track, track, track!
Your hybrid approach to savings makes a lot of sense. But if you need to make manual override and updates, would not it be easier to not automate at all?
For expenses, I completely agree with tracking expenses. And it’s true that tracking allows you better control and alleviate some of the issues of automating!
Thanks for sharing your philosophy!
Automating is good advice for people who usually don’t want to manage their money. It’s a tool to make people save something. For personal finance junkies like us it might be useless. Automating is not designed for us that’s why you think it’s a bad idea. I could automate but I just like to manually transfer everything and log in to my accounts. Most people are not like that.
I agree that automating finances is definitely not for us.
However, I would argue that the problem is that people do not want to manage their finances themselves. This is a mistake already. Everybody should intimately know his finances.
Thanks for stopping by!
I completely agree with you. Financial literacy is important for everyone. If you don’t know how to manage your money, you will never be able to control your expenses and income.
And using different tools to automate your finances will make life much easier.
That’s a good point to put it, you need to understand before you automate.
I use a hybrid approach. I initially set an automatic 30% to savings every month, which a first used to create a 12-month emergency fund and pay off debt. After getting debt free, I shifted the 30% to VTI. You are correct that this needs to be monitored, for which I use personalcapital.com, but this is, in my view, easier when automated. I absolutely do not set and forget. I automate, monitor, and adjust as needed. I also use a daily spending limit to make sure I spend less than I make and manually put whatever is left into either VTI, to replenish the emergency fund if I have dipped into it that month for unexpected expenses, or to other expenses at my discretion. As my income has risen and my spending has gone down, I have had to increase the amount to keep it at 30% and then to raise it to 35%, but that was a total of about ten minutes work done months apart, and then the automation does it. I consider this far more efficient, and way less tedious than doing manual transfers every month for the whole amount.
I also set up an additional checking account into which 1/12th of the yearly cost of my fixed bills goes into automatically each month to make sure I have the money to pay them, and I do automate the infrequent bills this account is meant to pay that I can’t make monthly. I find I am less likely to forget to pay these bills when they are automated, if I happen to be really busy when they come due. Since I routinely spend less than I make, I have gradually used this account to cover all my fixed bills and my primary checking account to cover the variable ones. By linking and monitoring all my bills at personalcapital.com, and logging into my bank account online, I have no trouble monitoring and tracking my expenses.
Stopping bills for discontinued expenses is simply a matter of disciplining oneself to stop the automatic payment first and the billing event second and treat it as one process.
I think you are arguing a false dichotomy to the extent you are framing this as either set-and-forget or full-manual-control. There are more than these two options, and there is no reason not to take advantage of the convenience of automating that which doesn’t pose a problem so long as you understand you still need to pay attention.
I just realized that I forgot to answer you! Sorry about that!
Yes, you are right. I am mostly comparing the two extremes: automating nothing or automate all.
A hybrid approach like you are describing is indeed great! I am not denying that changing your savings rule when your income increase is difficult. As you said, it likely less than 10 minutes. However, most people when everything is automated will simply not think about that. And this is the true danger.
If you have the rigor to do the automation while still keeping control, I agree it could be a great thing. But that is not something everybody possess!
Thanks a lot for stopping by and describing your strategy!
I, too, don’t like automating my finances. I’m not sure if it’s because it makes me feel like I don’t have control of my finances or not.
The only automation I use are splitting my check into different bank accounts (checking, saving, and Roth IRA) and a few bills that provide a benefit for having autopay enabled (discount on the student loan interest rate).
The feeling of losing control of the finances is pretty bad for me at least.
If you have a discount for auto-pay, that would make a nice difference indeed! I have never seen this in Switzerland.
Good to see a non-Wordpress site these days! Especially great idea to host it on Github!
Thanks for stopping by :)
Hi Mr. Poor Swiss,
Well, you just tried to saved the jobs of tens of thousands of over-priced financial advisers, even the fiduciary ones. They love you for this article! I guess you are talking about Robo advisers, which I love. I don’t use it because I am a DIY, but automation is coming because it takes the emotion out of the decision making equation. Professionals make financial mistakes too, 2008 is a perfect example.
More human errors! Musk of Tesla says that someday human drivers (and all of their accidents with 30,000 highway deaths a year) will be illegal to drive. I love the day when I can call my car to come to the front of my house and open the back door, take me to whatever, and drive me home while I listen to my favorite podcast or read the old fashion newspaper or magazine. And I will be very safe because the other cars on the road will be auto driven too. Which means, I will not be hit by a driver who is texting, drinking, eating, or too young or too old to be driving.
I not sure why you threw in the “pay yourself strategy” into your article. People who do this are not stupid, and it’s not automatic and lazy as you think it is. The REAL tragedy is that the vast majority of people DO NOT pay themselves first because they are caught up in our powerful consumer culture.
If you are talking about investing in stock and bonds, you are NEVER in complete control. All we are in control of is what Robo experts can do a lot better than humans whether professional or the regular investor. Robo adviser will keep us to our plan after we construct our fully diversified portfolio. And the Robo will rebalance with the portfolio gets out of whack, not what the market does or does not do. Rebalancing takes a lot of nerve if we do this ourselves, and that’s a problem, people do not like to change their portfolios when it gets off balance. We have no control over the gyrations of the stock and bond market.
Taking the emotional aspects out of money decisions is a good thing. Robo advisers are not ready yet, but its coming. Just like auto driving, just like the 15th century Gutenberg printing press angered the scribes at that time, and just recently, just like John Bogle’s indexing which Wall Street called it “Bogle’s Folly.” But the world is a better place thanks to the printing press and index investing! While Wall Street had the first laugh over Bogle’s courageous and new idea, 42 years later, Vanguard’s 20 million investors and $5.3 trillion in assets had the last laugh!
For the last 10,000 years, human civilization moves on, impermanence is good, in fact, it’s great, and a little scary and uncomfortable at times. But when we learn to embrace change, learn about it, and make it yours, new ideas are not “dangerous” they make the world a better place, which is always a good thing.
2 cents (pun intended),
That’s some comment!
I must not have been clear, but I am not advising financial advisors at all! On the contrary, I dislike them. Robo advisors are much better in general than advisors. But I do not think any of them are needed currently. In this article, I was mostly talking about automatic transfers, automatic bill payments and things like that.
As for people who pay themselves first, I do not say they are stupid! Far from it. I am just saying that most internet resources will advise you to save some X% of your income and pay yourself first. And if you do not do that smartly, you will save much less than you could!
I am not against automation in general! I would love to have a self-driving car. And I agree that in a lot of cases, automation is much better than human. I work in computer science and I know for a fact that computers are often better than humans.
Index investing is a great thing indeed. I do not advise to stock pick by yourself. I am myself using index investing for my investments.
I will have to make my point of view a bit more clear in the article it seems!
Thanks for sharing :)
Thank You! For a long time, I was thinking that I am alone. Sometimes I even felt stupid that I have never tried to do so. Just as you said I feel that if I would automate my finances I would let the control out of my hand. I pay my bills via e-banking by hand and almost never had a problem because of it. No late payments, no late fees. I always have a rough sketch how will my money spent so I always have an expected amount which will be saved in the start, in the middle or at the end of the month, it is totally up to me. So far these estimations proved to be pretty accurate. Thus I am guilty in not respecting another big commandment of PF, the “always budget and track everything” one. If you are mindful in your spendings you don’t really need that either. Ok, I assume you know where your money is going, like I do, otherwise you should track the hell out of it at least until you don’t find the leak. :)
I was also thinking I was quite alone before receiving comments for this article. It turns out that there are a few people who dislike money automation.
I really prefer being in control of my money. We have almost the same process about money.
Except that I track all the expenses that I do. I do not really budget since I can easily go over budget. However, I think having an entire list of expenses can help a lot when you need to cut them down! But once again, it is open to discussions ;)
I agree though that a budget is not entirely necessary if you are mindful enough.
Thanks a lot for sharing :)
Hy Mr The Poor Swiss
I’m happy that finally a blogger has his own opinion and show a contrarian view. On every blog you read always the same and it is a little bit annoying, but now you opened a discussion and made the readers think.
Let me show you my thoughts on your statements in sense of a discussion and not as criticism. Everybody has an opinion, there is no strict true or false.
I think automatic saving payments are the most effective for those who does not have control over their finances, but want to save more. Its kind of first step what to do if you want to keep more money. For advanced FI-minded people, it is not neccessairy but it can be also helpful in sense of less effort (instead of paying on ebanking or post) Its also helpful in Investing- f.e If you have an automatized ETF plan – You don’t time the market, because you always purchase with the same amount at each month and not whether you think the market is high or low.
“If you set it to 15%, why cannot you save 20%? Or why not 50%? And what are you going to do with the rest of the income? Are you going to splurge it all?“ – Your savings rate is not fix for the rest of your life. Tracking your expense and keeping in mind, that you want to save as much as possible (btw I don’t think, that it is the strict neccessairy to reach FI, otherwise you should only eat bread and never go on vacations till you reached FI) you will evaluate your spendings and you will see, “hey, I spent to much on that, instead I could have save more, so from now on I try to raise my savings to X%”.
“Another issue is if your salary is not exactly the same each month. What are you going to do with your yearly bonus?” – Once again, if your aim is to reach FI, you probably already read a few articles and I assume you have the spirit and the mindset, that if you receive unexpected money, you will save/invest it. For those who are not aiming FI, I don’t see it as a problem if they want to spend their part of the money, IF they have an automatic saving system with an already high savings rate.
“You should be in complete control of your finances.” – Totally agree with that.
“If you need to look at a bill each month, you will want to cut it down if it is too high. But if the money is simply removed from your account each, you will not have that will to cut it down.” – If somebody is in control with his finances, he must know, how much are his fix costs, he does not have to see it. He knows exactly which amount will go out of his pocket for this and that and he will always look after a cheap alternative (f.e. housing, mobile, internet, taxes, insurances). I don’t care if I see my insurance bills or not, I know exactly how much I’m paying and if there is something cheaper for the same quality I will consider a change.
“If you are the victim of financial fraud, it may take you much longer to find about it. Generally, it is easier to resolve financial fraud if you detect it as fast as possible.” “But depending on your account, you could end up in negative. This means heavy interest on the negative amount.”– agree, but I assume everybody who takes care of his finances looks at his bank account at least once all 30 days. Normally, from the banks point of view you have 30 days to react if you suspect something. Automatizing your housing rent and you accidentally end up negative because you did not receive your salary and you don’t check your account for 30 days is relative unlikely but in that case how much interest would you have to pay? I think not more than a meal. It’s not a good thing, but its not the end of the world.
“That means that every time you change bank, you will have to restart once again. You may also have some electronic bills automatically set up. And these electronic bills may not be transferable to a new bank. The same applies if you have direct debits taken from your account.” – On the other side, if you pay your bills non-automatically you have to pay them each time with e-banking or go to the post (you have to take effort as well). Some provider do charge an extra fee for paying the bill non-automatically.
I am happy to show something different as well :) Today, a lot of blogs feel almost like following a model. And some of my posts are sometimes a bit the same!
That is true that some amount of automation can actually force you to NOT time the market. But if you are smart enough, you will do it anyway and invest exactly when you receive your salary.
I agree that the savings rate is not fixed at all. But that is my whole point. Before advice for a set and forget strategy. That means they will set the same savings rate and never change it. If you adapt it every month, you can automate it. But then, there is less interest in automating it!
Yes, you should invest it if you get extra money. But in that case, automation will not help you :) Just being consistent.
Actually, looking at your finances every 30 days might not be enough. Yes, you have 30 days with most banks to make an action. But you may have to do it in urgency with having 2 or 3 days left. On the other hand, if you look at it every day, you will never be in an urgent situation.
Yes, you have to do the effort to pay the bill yourself. Of course, you should do them online. But you should still do it manually to have a feeling of the spent money. It is much more strong to have to sent that money away yourself than not seeing it being withdrawn automatically every month.
My position on the article was very strong. There are some obvious advantages to automation. The biggest danger is to forget it. If you do smart automation, it won’t be a danger.
Thanks a lot for stopping by and for the very interesting discussions :)
I do pay myself first. However, this is done manually. I completely agree with all these reasons for not automating payments. I have heard some horror stories – if one thing goes awry it can cause a domino effect that can take months to repair.
Hi The Debt Shrink,
It makes more sense to pay yourself first manually. I still think it does not help though, but if it is working for you, that is awesome!
Yes, it can very quickly become crazy.
Thanks for stopping by :)
I have never thought about it this way and I think in many ways you are on to something. I do use automation yet sometimes I think I could have saved more by adjusting the figures I save and invest manually instead of the same 15% each month.
In my opinion, the saved fixed savings amount is the biggest issue. Fixed numbers do not work very well.
15% is maybe enough for you, but maybe you could do 20% easily ;)
Thanks for stopping by :)