Financial Automation = Financial Freedom

[Editor's Note:  This is one of my favorite kinds of guest posts- completely unsolicited without any commercial affiliation, written by a regular physician reader about a relevant topic he has expertise in.  Daniel Ostermayer, MD, is an emergency medicine resident at the famously busy UCLA-Harbor Emergency Medicine Residency Program.  Daniel and I have no financial relationship.  Neither of us have a financial relationship with Mint.com, mentioned below, although they used to be an affiliate advertiser on this site.]

Financial Automation

“Simplicity is the ultimate sophistication” – Apple Computer.  1977

At the heart of financial independence lies freedom from worry.  We all seek relief from the worry of debt repayment, childrens’ education, adequate savings, retirement and the list goes on and on.   Of course adequate income streams and discipline are at the core of achieving monetary independence, but financial counselors often overlook one crucial tool to achieving financial freedom: automation.

Set It and Forget It

By automation, I mean a system that follows the rules of “set it and forget it”.  Just as engineering makes use of such systems every day to free up resources, automating your finances can unload worry and stress. You take tasks that require monthly or weekly completion and allow them to happen effortlessly.  An initial time investment for setup and design is required but afterwards, the system runs itself.  Using such a system for your financial management will ensure you reach savings goals, meet debt repayment obligations, and live more simply. [Aside from eliminating late fees and minimizing behavioral investing mistakes-ed]  Even better, the tools for automating your financial life are completely free, require only a few hours of setup effort and allow for easy monitoring so you can ensure that systems run smoothly.

Automatic Bill Pay


I will break down the financial automation system into three parts: bill pay, savings, and account monitoring.  First let’s take bill pay.  Most major banks and credit cards have systems for automatic bill pay.  Set up your rent, student loan or mortgage checks to mail every month since the amount is fixed and can easily be budgeted into your income.  Bill pay is almost always free if you have dual checking/savings accounts or keep a minimum balance.  You can also extend automated bill pay to your credit card.  Carrying a monthly credit card balance severely limits your ability to achieve financial goals.  All credit card companies allow automated payments through electronic transfer from your bank.  Set the transfer to always pay off the balance so you can reap the rewards of using a credit card such as airline miles, store discounts, or cash back and avoid all interest and late fees.  Automating credit card payments essentially makes your card a debit card with a 30-day float.

Variably priced utilities such as gas and water poses a small challenge but most companies allow for “budget billing” that sets a monthly payment option based on averaging of your utilities over a whole year.  Ensure that the utility company will refund your account for any overpayments at the end of year before choosing this option. I have found that the best option for variable utility automation involves having the utility company bill a credit card, which in turn, is set up for automatic payment.  If done right, you should be left with no bills to actively pay, freeing a couple of hours each month and eliminating the need to worry about bills when you travel away from home on a precious vacation.

Automatic Savings

I use Vanguard for all things savings-related but any company should allow automatic investment into stock and bond mutual funds directly from your bank account once a month. This system is identical to automatic investment plans already used to take money from your paycheck to place in your retirement account such as a 401K.  This system ensures that you reach yearly savings goals and lower your tax bill by maximizing your tax-protected accounts such as IRAs, Roth IRAs, 529s, and 401Ks.

Monitoring Your Finances Automatically

As mentioned earlier, financial automation follows the rule of “set it and forget it”.  The caveat being, no one should entirely forget about their financial life or it will certainly run astray.  Two options for automation exist: paper and electronic.  The old fashioned way is to look at your bank statements when they come in and balance your checkbook.  Automation makes this process extremely easy since transactions should remain constant from month to month.  I prefer the more tech savvy electronic variety.  All statements arrive in my inbox electronically yet I rarely read them.  I know the PDF files are always available if an issue should arise.  Instead I use free online software such as Mint.com (the same company, Intuit, also makes Quicken software).  All account credentials are managed by Mint and I can periodically see every account transaction and spending category in one place.  The software is available for the web and as a phone application. Every year I download a digital spreadsheet of all transactions for archival purposes.  Mint further automates alerts for fees and high spending and sends messages to my phone.

Spend an afternoon setting up this three-part system.  Then take time slowly releasing your grasp on micromanaging financial transactions.  After a few months the freedom of mind will bring you one step closer to true financial independence.

[I love this post and have implemented most of these principles already in my financial life.  It is unusual for me to go through an entire book of 25 checks in a year because so many of my payments are automated.  What have you managed to automate in your financial life?  Comment below!]

 

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Comments

Financial Automation = Financial Freedom — 5 Comments

  1. Great thoughts Daniel — it sounds very much like the recommendations made by the slightly-salty financial blogger Ramit Sethi in his book, I Will Teach You to be Rich. It’s definitely targeted for a younger demographic, and if you’re a regular reader on WCI, Bogleheads, The Simple Dollar, etc., then not much will be groundbreaking; nevertheless, it’s a good primer on automation and goal setting. Recommendations made by Daniel (and WCI + Ramit Sethi) do a good job of showing how automating your financial life will often help avoid a few late fees which will more than compensate for the twice-a-week Starbucks habit that so many people think is the real culprit of bad budgeting.

  2. I’m a busy resident and have done many of the above as well. Here are some other points:

    [1] Automatic pay-check deposit into checking account

    [2] Pre-pay car insurance for entire 6mo period
    -this saves on annoying bills and on the “transaction fee” when paying each month

    [3] Automate unneeded e-mails to delete box
    -this is not financial related, but saves just as much time. For ever e-mail sender I don’t want mailing me, I create a rule and it gets sent to delete box. This make it easier to review e-mails.

  3. There are many books and sites that talk about similar ideas. For more reading on practical and theoretical ways to work more effectively and unload tasks for automation the “4-Hour-Work Week”, “The 80/20 Principle” and “The 7 Habits of Highly Effective People” are all great reads. It is probably better to read more theoretical than practical guides and then take the concepts and then individualize to your own life.

  4. GREAT guest post!!! I do a lot of daily money management work with clients’ cash flow problems, and you hit the nail on the head with all of this! Automation is key! Another great free online tool (with a great App) I would recommend is Page Once (www.pageonce.com). Keep up the great work on this blog!

  5. By going electronic, our file will be more organized. It is important to be organized because it is a sign in which you know everything that happens to you. Same in monitoring the expenses, budget every money that comes in and out. Remember, prioritize the savings first. Great post!

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