A couple weeks ago, I made brief mention of my financial automation account and how I've come to consider it my "free money" account. I wanted to dig into that topic just a bit more, since it's become a key component of my own regular financial well-being.
Why an Automation Account?
Simple: it's thoughtless, once set up.
That's not to suggest having such account(s) are without action, check-in, or other periodic intervention. It is to suggest that the recurring major expenses (or recurring expenses without much deviation) can be set up in such a way that there's no thought in getting them paid other than a periodic check-up.
Once you have the data necessary to automate, it's simple to use and contributes to a peace of mind.
Really? A Separate Account?
Most everyone is familiar with the concept of auto-pay or bank pay or bill pay or whatever you might call it: the way a creditor/vendor/provider might withdraw funds (ACH to a checking account or charge to a credit card). That service is great, and is absolutely a component to this solution. The biggest difference is in actually having a dedicated account to such things. Does it have to be a separate account? No. But you will miss out on any incentive benefits ("free money") by not having a separate account.
How To Start
For me, it all started when I received an 'invitation' from one of my banks to open a new checking account. 'I need one of those like a hole in the head,' I said to myself. But as I thought about it some more...it made some sense. I was already basically doing all of the automation steps, but from a generic common account...and I always had to think about how much money was in the account on the transaction date(s)...
There was also a sign-up incentive on the new account of a couple hundred dollars if I had a direct deposit set up and kept a positive balance for at least three months. That won't be a problem...there's no minimum spend required; I just can't close the account (or have it closed) for that first few months.
So I gave it a shot.
What To Automate
I started with our mortgage payment, since that is a stable amount which only changes annually at escrow recalculation time. Further, since our refinance several years back I keep paying the old amount (which was marginally higher)...so the calculation was even simpler. Basically, figure out how much you need to stockpile:
Monthly payment amount * 12 = Annual $ required for payment
Important: Round this figure up (certainly to the next dollar, if not the next 5, 10, or 15).
Then figure out how much you'd need to set aside based on your income stream. I'm paid biweekly (26 times per year), but I used a bimonthly (24/year) calculation to provide additional buffer room (one month's extra payment each year):
Annual $ required / 24 = Deposit amount required per paycheck
Take that last figure (deposit amount per paycheck) and set up direct deposit for said amount into the automation account. Don't use the account for anything else but what you've planned to automate. The slightly inflated deposit amount will ensure enough money is available throughout the year.
If you add other payments, adjust the deposit calculation appropriately.
What About That "Free Money" Thing?
There are two components to this I'll mention:
- Due to my calculations, two months of each year receive a third direct deposit contribution. These two add up to an additional month's payment without even thinking about it. Use this money as you see fit. I've used it to offset homeowner's insurance premium changes, make an additional payment, bolster specific savings goals, or as special money for vacations or one-time spends.
- New account sign-up bonuses/incentives: take that sign-up money and ship it off to wherever you keep fun money (or your specific savings goal).
Caveats To New Accounts
Be judicious. More accounts mean more things to keep track of, which can mean unnecessary complexity.
Don't sign up for accounts you won't use for at least a year, if not two. Read the fine print, because some banks will require several months (if not at least a year) of commitment to receive (and keep) the sign-up bonus.
Timing is key. Depending on when you create a new account, you might have to front-load some of your contribution. If you car payment comes out on the 10th, but you create the account on the 21st, you might not yet naturally have enough money deposited before the first withdrawal. Same applies for changing accounts already on auto-pay or direct deposit. Make sure you understand when and where money might be before making the change. Don't get stuck with bank overdraft fees.
Don't pay fees. If you find an account that's charging you fees (especially if that wasn't part of the original arrangement), drop that bank like that bad high school relationship and find a new bank...preferably with a sign-up bonus.
Read the Fine Print. Only you can decide if an offer is worth your time or commitment, or both. "Free" isn't necessarily free, and there are rules you must follow.
Be creative! I recently signed up for an account only requiring a six month commitment (a several hundred dollar reward with a combined several hundred dollar secondary credit card reward perk). I wasn't interested at first (though the money was definitely an incentive) because I didn't have a need. But I thought about some options that would meet the deposit and transaction requirements, and decided it was worthwhile. Full disclosure: I will likely terminate the account after about 14 months.
Check In Quarterly (or at least semi-annually)
This is especially important during the first six months or so of your automation. Check in to make sure things are set up as you expected. Check in whenever you need to make a change. Don't be afraid to make changes. Make sure the minimum balance is always above zero (and ideally growing modestly following each withdrawal). Check in when you feel inadequate (seeing something work automatically can be a boost).
You Can Do It!
It seemed silly when I created my first automation account which remains my primary automation account several years later. I like the bank in question, and the process I've set up with it works well. But I am always open to a new account bonus...because it's money on the table. But it does require a level of responsibility and wise management. By automating the contributions and deductions, however, it has taken the majority of the work out of the process.
I'm firmly a believer that a 21st century bank should work for me, not the other way around. But the reason why is a story for another time...
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