In the Personal Finance community, many people are advising everybody to automate as much as their personal finances as they can. I am not one of them. I do not automate anything in my personal finances. In fact, I do not like automation for my personal finances. I think it is a big mistake. It is a lazy excuse for not being rigorous enough to manage them yourself. The worst is actually the “set it and forget it” advice for automating your personal finances!
I will not deny that there are some advantages to automate some things in your personal finance routines. But I believe there are mostly disadvantages in doing it. Many people will not agree with my point of view. But this is something I have wanted to write about for some time.
In this post, I am going to describe the reasons why I do not like money automation. In fact, I believe it may be a bad idea for most people to automate their finances. This is an advice that is given on way too many personal finance media. As you will see in this post, there are many reasons why this is a bad advice!
What is money automation?
Let’s start at the beginning with what is money automation. 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 automate is 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. 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 really great. But you 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 automatically invest your money. But this is not what I am talking about here. I may talk more about it in the future.
Paying yourself first is not efficient
One advice that you are going to 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 on a 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 saving is enough? If you want to retire early, you should save as much as possible. It is difficult to set this amount. Moreover, it will make you satisfied with a small amount. 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?
You should not be content with a small number. You should save as much as you can! This is the 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 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 exactly the same each month. What are you going to do with your yearly bonus? Are you going to spend it all because it is not automatically sent to your savings? No! Extra income should come as extra savings opportunity. And what if you sell some of your stuff one month? The same should apply! You cannot plan for all the income that you are going to get. Therefore, you cannot fully automate your personal finance.
It makes you lose control
Some people will tell you that it is good to not know what is going on, to lose control and let the system do everything. This 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 totally worth it to be in full control.
Why? First of all, if you do not really know what is going on, you will not realize that 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. This is dangerous in my opinion. This comes back to the fact that it is not efficient. You should save as much as you can, not a fixed arbitrary amount. There are some banks that 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 automate your bills. There are some bills you can automate like your rent and your taxes. There is not a lot you can do to change these bills. However, by automating 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 that 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 change 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. There are many people who will do it wrong. On the other hand, if you have simple bills, it is much more easy to not pay for what you do not need anymore.
It 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 automate your finances a lot, you will almost not look at your bank accounts. Many people are actually advocating for a set-and-forget strategy with money automation. But this is an 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. If you automate 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 are going to 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. This means heavy interest 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 password. 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. This is not a good criterion for choosing a bank in my opinion. Today, the best criteria to choose a bank are the low fees and the interests offered.
It ties you to a bank
One big problem with too much money automation is that it will ties 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 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 averse to change bank account. It will make it more difficult to change bank. 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. This 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 really automate before. I only had a few electronic bills and a few direct debit orders. But now I actually want to avoid all forms of automating my personal finances. I want to be able to change bank as easily as possible.
As you can see, I am a bit adamant against money automation. For me, it is just plain lazy. And it is too easy to forget about your personal finances. I do not think it will really make for 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. I believe that everybody should have the self-control necessary to not 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 of automation if you really 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 really not able to restrain yourself from spending all you have, money automation is probably not 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 do automate 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. This is also a good time to check that you do not pay for something you do not use or pay too much for something.
As a last note, it is not because I am advising to not automate your finances that I am advising to pick individual stocks or to use 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 cheaper) jobs than robo-advisors. But they are probably much cheaper than human advisors.
What do you think about automating your finances? Do you do automate your personal finances?