“Out of sight, out of mind” isn’t typically the kind of advice you get from a financial professional. However, taking some financial decisions off of your mind and out of your hands can be one of the smartest money decisions you’ll ever make. We’re talking about the power of automation. Automating most or all of your recurring financial decisions can be a huge help when it comes to saving, investing, and digging yourself out of debt.
Even better, many popular financial resolutions for the new year — paying off debt, building an emergency fund, investing, saving for a large purchase, and building your credit score — are easy to automate.
What Is Automation?
Dr. Barry Schwartz, a behavioral economist and author of The Paradox of Choice: Why More Is Less, says we may be naturally programmed to live in the here and now and think about the future when we get there. By learning to use tools and life hacks to automatically make choices for our financial well-being, we’re removing one of the biggest barriers toward financial health: ourselves.
“People have a hard time thinking accurately about risk, and they have a very hard time giving adequate weight to the future,” says Dr. Schwartz. “Automated investment would address both of these problems. But, of course, the software would have to be doing the right thing for the client rather than the company.”
When you automate, you eliminate the opportunity for that negative feeling to affect your decisions because you won’t be actively making that payment.
7 Ways Automation Can Help You Keep Your 2017 Resolutions
If your goal this year is to learn budgeting, save up for a large purchase, or simply try to better manage your finances, automation can be a huge help.
Automate Your Budget
Creating a budget is the easy part. Following it becomes the real challenge.Try these two automation hacks to stick with your budget in 2017.
Create a bank account for your allowance
- Open up a secondary checking account with your bank, but don’t get a debit card for this one. The account will act as your “reserve” account. You’ll keep your fixed and flexible spending money there and schedule bills to be paid from this account.
- Figure out how much money you can freely spend each week (after your bills are paid).
- Set up an automatic weekly transfer from your reserve account to your “spending” account (main checking account) for that amount.
It will be like getting a weekly allowance to spend on whatever you want, just like in middle school.
Use apps that do the math for you
Sometimes all we need is a little nudge to follow through with our goals. Budgeting apps like Level Money, Budgt, or Daily Budget can be the reminder you need to keep to your budget each day. The apps take into account your income, fixed expenses, and savings goal to come up with a daily spending number.
Level Money will connect to your bank accounts and generate the number automatically, while Budgt and Daily Budget require you to enter your spending manually, then generate what you have left to spend for the day. The apps will notify you daily with how much cash you can spend each day and still stick to your budget.
Automate Routine Expenses
This one is for anyone who has ever walked into a grocery store to buy a gallon of milk but walked out with bags full of things they didn’t really need.
You can save time and money on groceries by avoiding the grocery store. That doesn’t mean you have to stop buying groceries and splurge on dining out. Automate your grocery shopping with services such as AmazonFresh or Fresh Direct. The services cost about $150 to $200 annually. With these services, you are able to compare prices and add and subtract items from your cart to stay on budget, then schedule your delivery time.
You could also try a meal delivery service like HelloFresh or Plated to deliver fresh ingredients coupled with recipes for meals weekly. Using these services, dinner for two costs about $10 to $15 a person. If you’re a couple that dines out often, scheduling weekly meal delivery and cooking could help you cut back significantly on spending.
If you live in an urban area like New York or Los Angeles, you may have several other options for grocery delivery available to you.
Automate Your Savings
Automation makes it easy to set aside funds for an emergency fund or a large purchase such as a down payment for a home.
If you get paid via direct deposit, check with the human resources department at your place of employment to see if you can split your paycheck into different accounts. If you can, send the amount you want to save from each check into your savings account. If your pay is inconsistent, you may be able to set this amount as a percentage of your pay.
If your human resources department doesn’t offer that option or you simply want to handle it on your own, you can set up an automatic transfer to your savings account and schedule it for the dates you get paid.
…on your smartphone
You can also try automated savings software such as Digit, Qapital, or Simple.
Digit, backed by Google’s venture arm, analyzes your spending habits then uses an algorithm to determine how much it can transfer to your Digit savings account and how often to make transfers. When you need the money, you can have it transferred in one business day by sending a text.
Qapital lets you set savings goals and rules to match them, then automatically transfers money toward your goal when the rule applies. For example, you can set a savings goal to purchase $200 tickets to a music festival, then set a rule to round up all purchases you make with your debit card to the next dollar and save the difference. Qapital will transfer the difference to the account designated for your festival tickets.
Some new digital banks have added budgeting tools. Simple, for example, calculates a “safe-to-spend” number so you know how much you can spend freely.
Automate Your Investments
You don’t have to be a financial whiz to invest your money. If you plan to start investing this year, you can do so passively with automation.
An important and easy way to do this is to automate savings to your retirement account(s). If you contribute to a 401(k) or an IRA through your employer, you can set a contribution as a percentage of each paycheck. Some plan providers allow you to automate annual contribution increases. This way, you’re automatically saving more each year without having to do any extra legwork. Even an annual increase of 1% or 2% can drastically improve your savings outlook.
If you use robo-adviser services like Betterment or Stash, set up auto deposits for your accounts and let them grow. Acorns is a great tool for beginners to automate investing. Acorns rounds up each of your transactions to the nearest dollar, then invests the difference.
You can find more details about these apps, such as what fees they might charge to manage your investments, here.
Automate Your Student Loan Payments
If you resolved to stay on top of your student loan payments this year, setting up automatic payments could be tremendously helpful. Automating your payment can help ensure you pay on time each month. With most servicers, you’ll get the added benefit of .25% off interest on your loans.
If you want to pay back your loans faster, you can automate an additional payment to all of your accounts when you set up direct debit. If you can’t set up an automatic additional payment to a specific loan, you can set alerts with a calendar or a budgeting app to remind you to make an additional payment to your loans on payday.
Automate All Your Bills
You can automate most recurring bills like your rent, credit card payment, auto loan payment, utilities, and subscription services to avoid missed payments. This tactic can also help time your payments to ensure you have enough money in your accounts to cover them. There are several options to help schedule bills you know need to be paid each month.
Choose whichever of the following methods work best for you:
- Set up automatic bill pay through your bank’s online banking platform.
- Use a budgeting app like Mint, Level Money, or YNAB to link to your accounts and schedule automatic payments.
- Set up an automatic debit with each individual service provider through their online platform or over the phone.
If you pay an individual each month for something like rent or shared utilities, you can pay them via automatic bill pay to their bank account, or set up automatic payments using a tool like PayPal.
Automate Your Credit Makeover
If your goal is to improve your credit, paying bills on time and lowering your utilization rate are the two most powerful things you can do.
Debitize lets you use your credit card like a debit card. The app automatically transfers money from your checking account to pay off charges to your credit card with money. You’ll be using your credit card, then paying it off in full each month. Even better, it’s more difficult to overspend, since you’ll be using up the funds in your checking account.
If you’re building or rebuilding your score with a secured card or a new credit card, you can try this “set it and forget it” method:
- Figure out what 20% of your credit limit is. Example: 20% of $200 is $40.
- Find something that you pay for each month that costs less than that. This might be a payment for a streaming service such as Hulu, Netflix, or Spotify.
- Set up your account to take the payment from your credit card each month.
- Set up your checking account to pay your credit card balance each month.
- Watch your score grow with a credit monitoring service like Mint or Credit Karma.
When your score reaches the high 600s or mid-700s, you’ll have an easier time qualifying to borrow large amounts for an auto loan or a mortgage.