How do You Pay Yourself First ?
I was reading another site and saw that someone has written a book or is charging folks to learn how to make their personal finances automatic so in response to that, here are some simple ideas (for free (and thus worth every penny you paid for it)) to automate bill payment for your personal finances. I offer these ideas as a possible solution, your mileage may vary, and with all personal finance you should make sure this fits into how you deal with your money (and as always pay yourself first ).
Yesterday I outlined a simple way to make sure we follow one of the pillars of personal finance Pay Yourself First. This methodology is automatic, and hopefully helps folks to hide money away for a rainy day.
Automating Bill Payments
How is this possible? Well you may ask that good reader, this heuristic is simplistic in it’s details, so please make sure you understand what the methodology outlines before trying to implement it.
First, find all of those monthly bills that you pay, excluding your credit card bills (given those bills can have wildly different balances each month, I like to exclude those from this system). Some examples of these bills would be:
- Electric Bill (or Hydro as we would say in Quebec)
- Water & Sewers Bill
- Heating Bill (if you don’t heat with electrical
- Home Phone Bill
- Cell Phone Bill
- Mortgage and/or Rent
This list of bills, you can figure out what your average monthly outlay is, assuming all these bills are close to the same amount every month (if any of these bills vacillate wildly over the year, you might want to exclude it from this method, or make provisions for this happening).
We had two bank accounts from yesterday Working and Savings First, we now create a third account which we can call Bill Payment. This account is effectively a working capital account, so it should not have penalties for number of transactions, and such, because money will go in and out of it a great deal.
Once this account is set up, you need to set up another per pay cheque automatic transfer to this account, because this is where your bills are going to be paid from.
Some Simple Arithmetic
How do we figure out how much to be transferred? Look at how much you spent on the bills over the past year, take into account any increases in service fees, and then take that amount and divide it by the number of pay cheques you will have over a year (i.e. if you are paid twice a month, divide by 24, if you are paid bi-weekly, divide by 25.5, etc.,). This amount is what you should transfer to the Bill Payment per pay cheque (at a minimum). I added at a minimum, because it is best to have a float in this account, in case there are unexpected charges or increases in your bills every year. It would even be better to start this account with a float of at least 1 pay cheque worth of payments, in case of problems.
So now you have solved half the issues with monthly bill payments, you have taken that money away automatically, before it is in your Working account.
How do I pay these bills monthly? That can be dealt with in a few ways, and can be automated as well:
- You can set up with each company a direct withdrawal of money from your Bill Payment account. I really hate this idea, but include it for completeness. I never like anyone taking things directly from my bank accounts, but this is one way to make your bill payments, automagic.
- Set up payments from the Bill Payment account to every one of your bills that pay 2 days before your bills are normally due every month. This is a little tricky because you have to cheque with each bill, to see when they are normally due, and then set up a recurring bill payment for that bill using your On Line Banking or Phone Banking system (the same way as we did for automatic money transfers). Doing it two days before means you are less likely to be tripped up by weekends and holidays.
- You can try to pay your monthly bills bi-weekly (this one is tricky, some firms really get pissed off when you do this). Simply pay a portion of every bill on each payday. You need to calculate what 1/2 of the bill is normally and simply pay it every pay cheque. This will mean that eventually you will get ahead of your bill payments (if you are paid bi-weekly). I tried this for a while and had two companies phone me saying they didn’t like this, and told me to stop doing it (very interesting).
This heuristic can work, but I would strongly suggest you do it manually for a month or two, to see if it can work for you, and if it seems to be OK, you can automate it after you are done.
If you automate your saving (i.e. pay yourself first) , and automate most (if not all) of your bills, all you need to do then is control your day to day spending, which might be a little easier if you only get a smaller amount of money.