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 finances automatic. Here are some simple ideas (for free (and thus worth every penny you paid for it)) to automate bill payment. I offer these ideas as a possible solution, your mileage may vary. With all personal finance, you should ensure this fits into how you deal with your money. As usual pay yourself first.
Yesterday I outlined a way to ensure 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? This heuristic is simple, please make sure you understand what the methodology outlines before trying to implement it.
Find all of those monthly bills you pay, excluding your credit card bills. Credit Cards can have wildly different balances each month, I would 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
- Internet access
- Streaming services and/or TV charges
- Mortgage and/or Rent
With this list of bills, you can figure out what your average monthly outlay is. This is assuming all these bills are close to the same amount every month. If any of these bills fluctuate 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. Create a third bank account which you can call Bill Payment. This account is effectively a working capital account. 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 automatic per-pay cheque transfer to this account because this is where your bills will be paid.
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). Have a minimum float in this account in case there are unexpected charges or increases in your bills every year. 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?
- You can set up a direct withdrawal of money from your Bill Payment account with each company. 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 usually due every month. This is a little tricky because you have to check with each bill, to see when they are generally 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 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 usually is 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 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.
There are service fees for using a Credit Card to pay a bill. This was a great way to pay bills on time. Now with these fees, it is not as good a solution to the problem of paying bills on time.
Many people use a strategy similar to this to automate all their payments. I don’t like letting organizations reach into my bank account. I’d rather pay each bill explicitly. I’ve had too many bad experiences with businesses taking the wrong amount or, more commonly, continuing to take money long after they should have stopped.
My sentiments exactly! Any automated payment scheme should preclude anyone getting access to your bank accounts, and if they do, you should change bank accounts quickly.