Mrs Micah has inadvertently started a meme going around the PF Blogosphere about the Best

Personal Finance Idea of the Year, so I thought I’d jump on the bandwagon too.

My Best Personal Finance Idea of the Year (and of all time) is

Automate Your Finances

by automating your finances you don’t have to worry about missing card statements, of not contributing to retirement accounts and of having penalties and late fees tacked on to your credit card bills.

Automate the Bills

The first thing to do is to look into getting a bank account with on-line access and Free Bill Pay Service. I use Bank of America, and have since they started on-line banking. Everyone’s opinions differ, but I’ve never had any problems with BofA in the years I’ve been with them.

Once you have the account, then you set all your sources of income to direct-deposit to this account; salary, paychecks, whatever, you want it all to come to this central account.

EBills are your friends

Next, gather EVERY bill that you pay regularly. Enter them into the banking system you’ve chosen as payees. After they’re entered, they can be paid from the bank account (NO MORE WRITING CHECKS OR USING STAMPS). Next step is to see how many of the bills are EBill capable

EBills – Many companies today allow the billing and payment of their bills automatically. From your bank account you can ’subscribe’ to your utilities’ or credit card’s EBill service, and the monthly statements will be delivered (in electronic form) to your bank. From there, you can pay them via electronic transfer on an automatic basis.

EBills can also be set up to be automatically paid by your bank. You can choose to pay the amount due, total balance due, or a pre-set amount each month.

Subscribe to EBills for all the bills that offer them, and set up an automatic payment for the minimum balance due on the date due (You can pay more, but this is a safety-net to prevent you from forgetting to make a minimum payment, remember the idea is to be able to forget your bills and still have them be paid.)

EBills aren’t for everyone

Some credit cards and utilities don’t offer EBills (yet) so they need to be set up a different way.

• Utilities – Most utilities have an option for registering for a level-pay scheme so that you pay the same monthly amount, based on the previous year’s average billing amount, rather than a widely-ranging amount (i.e. Gas and Electric bills during the winter). Register for this service with the utility company directly.
• Credit Cards/Other Bills – For other bills, find the minimum payment amount, and set that up manually as a recurring payment. Usually you’ll have to keep an eye on these, but for credit cards, as long as you don’t charge more to them (hint, hint) the minimum payment decreases each month. This gives you a small ‘double whammy’; As you pay a set amount each month, you automatically pay a small amount more on principle each month, as the minimum payment shrinks automatically.

Automate Your Retirement Contributions

Next is to make sure you ‘pay yourself first’. Most employees offer some kind of retirement fund, so take advantage of it. Find out how much you need to contribute to get your company’s matching benefits, and have that amount automatically deducted from your pay. It’s really Not As Much As You Think. 401k, Roth 401k, Standard retirement fund, whatever, just contribute enough to get the matching funds. Starting next year, if you change jobs/plans, you are AUTOMATICALLY signed up for this minimum amount unless you specifically opt-out.  

If you’re business doesn’t match, or you’ve contributed enough to cover your company’s deductible, you might want to set up a Roth or Traditional IRA. You can set one up for you and for your spouse. The contribution limits for Traditional and Roth IRAs for 2008 is $5000/year ($6000 if age 50 or above). That works out to about $416.66/month or $192.31 per pay period based on 26 pay periods. Quite a sum, but if it comes out automatically, you’ll forget all about it in a few paydays.

Automate Your Savings

Next, send 10% of your gross pay to another account. Just 10%. Sounds like a lot too, but you’ll be surprised how soon you learn to live on the other 90%. This is your Automatic Emergency Fund. The longer you fund it, the more ‘emergency’ you can afford. Think of it this way, for each year you fund this account, you can live without income for 1 1/3rd months (approx.) Do this for three years, and you have around 4 months emergency fund, AND YOU DIDN’T EVEN FEEL IT.

Automate Your Investments

You’ve automated retirement already, so if you want to do a little investing, here’s a painless way to do it too. Open an account with an on-line brokerage company (E-Trade, Banc of America, etc) and have a set amount sent to the account. Most on-line investment companies allow you to automatically invest at regular intervals. Pick a good variety of stocks, bonds and/or mutual funds, or go for the tried-and-true Index Fund. Watch it slowly fill up as time goes by.

The Goal? Forget Your Bills Completely

Once everything is covered, you should only have to spend a few minutes a month making sure the money machine is chugging along like it should. Now you can concentrate on discretionary spending and debt elimination. All the money that ends up in your account is available to be used for normal day-to-day expenses, or can be used to snowball away your debts.

Bills shouldn’t be something that takes center stage in your life. Put them on a system, then just watch the system periodically and concentrate on more important things.

Photo by Babasteve