I'll confess: More than once, I've been late to pay a bill simply because it slipped my mind. I've tried several methods to solve this problem. I used to pay my bills on the day they arrived, which was effective despite being a pain in the neck. But over the past few years, I've embraced the joys of automation. It's given me a little extra free time and eliminated the possibility of late payments.
Although there's no one right way to automate your finances--each person's financial infrastructure is different--the following arrangement is close to ideal.
• First thing's first: If you have access to an employer-based retirement plan, use it. Set some money aside automatically from each paycheck to save for the future. Ideally, that should be 10 to 15 percent of your income. At the very least, contribute enough to get the full employer match. This isn't free money, but it's darn close.
• While you're advising HR to boost your retirement contributions, tell them to start automatically depositing your paycheck to your savings account.
• Most folks use a checking account as their default money management hub, but I think it makes more sense to use a savings account. (It's part of the whole "pay yourself first" philosophy.) If your local community bank or credit union offers good rates, open a savings account there. Otherwise, use a site like Bankrate.com or Money-Rates.com to find an online, high-interest savings account.
• Next, set up electronic bill pay for every standing obligation you have: cable, internet, gas, electric, sewer, trash, rent, mortgage and so on. In some cases, you may even get a discount for setting up automatic bill pay. (I get $2 off my auto insurance each month because I pay electronically.) It may take a couple of hours to set up all of your automatic payments, but then you don't have to worry about them again for months--or years.
How to Automate Reclaim your mailbox. Use OptOutPrescreen.com to put insurance and credit card offers on hold for five years--or forever. Cancel other junk mail through DMAchoice.org.Computerize your checkbook. Quicken or a simple spreadsheet can make things easier, but many folks swear by free online money-management tools like Mint.com and Yodlee.com.Use targeted savings. Most people save for several big goals at once: buying a new home, sending a kid to college, taking a trip to Thailand. Instead, open a savings account for each goal and automatically transfer money from your main account each month.
• Don't forget to schedule monthly contributions to your Roth IRA or other investment account. Even if you have a 401(k) or 403(b) through work, it's always good to save more. Most major investment companies (like Vanguard and Fidelity) make it easy to set up regular, monthly contributions. If you don't yet have a Roth IRA, it's easy to get started using discount brokers like ShareBuilder.
Now that you've automated most of your financial necessities, it's time to give yourself an allowance. Schedule a monthly transfer from your savings account to your checking account. The amount is up to you, but it should be enough to cover the bills you can't automate, routine expenses (such as gas and groceries) and, of course, a little something for fun.
This basic framework can decrease some of the drudge work of money management while also reducing human error. (You'll be less likely to miss a payment simply because you forgot to send a check.) Be careful, though. Automation isn't a "set it and forget it" process. The goal is to create a system where you're doing the right things by default and making your life more convenient. But you still need to pay attention. Always review your bills and statements to be certain nothing fishy is going on.