As technology has progressed, the internet has become ubiquitous, and so financial automation has flourished. It’s nothing new, but now it’s so deeply ingrained in culture. Financial automation, as I’m using the phrase here, refers to when you automate much of your cash flow.
On one side of the coin, there is automation of cash inflow, where you receive your paycheck and have a system set up where that money automatically goes places you want it to go. Some of it will go directly to a retirement account where it will automatically be invested for you. Some of it will go to health insurance and life insurance. The rest will go to your checking and savings accounts. You can even automate it so that your checking account sends money to your savings account on a regular basis, forcing you to save.
On the other side of the coin, there is automation of cash outflow, where you automatically pay your bills. Some online banks can be set up to pay nearly all of your bills for you at regular intervals, or sometimes you can set up individual accounts with companies that bill you to automate the billing process. Much of your bills such as your rent/mortgage, utilities, cable, and internet can be paid for automatically.
I am moderately against the concept of financial automation, or more precisely, I’m against the mindset that often accompanies financial automation. Financial automation itself is convenient when used properly, but it’s all too often abused. There are so many people, I’ve noticed, that send thousands of dollars to their retirement accounts without possessing even the smallest fraction of knowledge about investing. But this is the least of my focus here. Automation of cash outflow is the real problem as I see it.
When one allows money to automatically flow away from them, they’re less inclined to pay attention to how much is really going out. Years can go by without any significant financial progress because way too much money is just flowing away from that person and they’re not really seeing the big picture. People pay for tons of services they don’t really need, not because they necessarily want them but because they aren’t carefully keeping track of them.
I recently discovered that a friend of mine has a $120 cable bill even though he only watches two channels. He pays for cable for extra rooms in his house even though his children have moved out now. He pays for every premium channel that he doesn’t watch. As far as internet is concerned, he pays for American Online that he hasn’t used for 10 years in addition to his current high-speed internet bill. That’s 10 years of useless AOL bills. He simply does not pay attention to where his money is going, and his bank just pays all of his bills for him.
That’s not how you build wealth. You build wealth by knowing accurately how much cash is flowing into you and how much cash is flowing out, and tuning the system for efficiency. It’s not about depriving yourself of what you need or want, but it is about making sure your money is going towards things that are actually important to you and that provide you with a solid value.
If you’re going to automate your finances for convenience, avoid the pitfall of removing your mind from the equation. Take all the benefits of automation (namely convenience), without giving in to any of the downsides (like a reduced level of awareness of your finances).
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Combined with automation out, one needs to have in place a definite asset allocation along with appropriate funds alligned with the allocation. Then allocate appropriate percentages into your funds. Good post, it’s going in my round up.
Great post…and blog. I don’t think anyone can say it better than when Jim Cramer wrote in his book, “I have a strong distaste for anything concerning my money that can be described as automatic.” I agree with you that in order to build wealth you have to know how much money is flowing where and then optimize it for maximum performance.
-MoneyMan
Great article. While I automate the inflow/outflow, I also monitor it daily & read each statement.
Although there are pitfalls, one of which happened recently and I’ll be posting about tonight.
Best line – avoid removing your mind from the equation. Even for all his wealth, I read somewhere that Warren Buffet still scours each of his bills for erroneous charges.
I agree with you. I am “mildly against automation.” I am more of a control freak and I need to have control over how much cash is going out. Automation is a good idea when you have a fixed payment (i.e. a car payment) but not that great when you invest. Great post!
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