Automating your money

The most reliable financial systems are the ones that operate whether or not the person is paying attention that month.

Why automation works

The behavioural evidence.

Decisions requiring repeated willpower fail over time, while structural changes persist.

Default settings have a large effect on outcomes, which is why automatic pension enrolment substantially increased participation in every country that introduced it.

Money that leaves an account before it is seen is not experienced as available, which removes the trade-off entirely.

And on the weeks when someone is ill, overwhelmed or distracted, an automated system continues while a manual one stops.

What to automate

In order of value.

Pension contributions, particularly to the level of any employer match.

Savings, transferred on payday rather than from what remains at month end.

The sinking fund for predictable irregular costs.

Debt repayments, at more than the minimum where possible, with a fixed amount rather than a percentage that falls as balances do.

All bills by direct debit, which frequently attracts a discount and which removes the risk of missed payments affecting credit files.

Transfers to a separate account for discretionary spending, where the balance is the budget.

And increases, where the provider allows contributions to rise automatically with pay or annually.

The timing

Which matters.

Set transfers for the day after payday, not the day of, since payment timing varies.

Move bill payment dates to shortly after payday, which most providers will do on request.

Which means essential payments and savings leave before spending, and what remains is genuinely available.

This single restructuring, done once over an afternoon of phone calls, improves every subsequent month.

The account structure

Which makes automation meaningful.

A bills account receiving income and paying all fixed costs.

A spending account receiving a fixed transfer, where the balance is the budget.

A sinking fund account or pot.

A savings account at a different institution, so it is not visible as spendable.

And for self-employed people, a business account and a tax account.

Balances then mean something, which they do not when everything is in one place.

Automating increases

The technique that captures pay rises.

Lifestyle expands to absorb income increases, which is why people at higher incomes frequently save no more than they did before.

Committing in advance to direct a proportion of any future rise to savings or pension prevents this, because the money is never experienced as available.

Several pension providers offer automatic annual escalation of contributions, which has good evidence behind it.

And doing it at the moment of a rise, before the first payslip at the new rate, is considerably easier than doing it later.

What not to automate

Where attention is still required.

Anything on a variable rate or subject to renewal — energy, insurance, broadband, mortgage deals — where automation without review means paying whatever is charged.

Subscriptions, which should be reviewed rather than left running.

Investment decisions requiring judgement, as opposed to regular contributions which should be automated.

And the annual review itself, which should be diarised rather than left to occur.

The review that keeps it working

Two occasions.

Monthly, briefly: check that the automated transfers went out, check for unrecognised transactions, and check the overall position.

Annually, more thoroughly: review every fixed cost and renewal, review the amounts being transferred, review whether the structure still fits, and check credit files.

An hour a month and an afternoon a year is the whole maintenance requirement for a well-structured system.

The failure modes

What goes wrong with automation.

Insufficient funds producing failed payments and charges, which is prevented by the account structure above and by a small buffer in the bills account.

Forgetting what is set up, which is prevented by a written list of every automated payment.

Automated payments continuing after they should have stopped.

Amounts becoming inappropriate as circumstances change.

And the false sense that no attention is required at all, which is where renewals and rate changes go unnoticed.

For irregular income

Where automation needs adapting.

Automating a fixed transfer from a buffer account to the everyday account, rather than automating from income directly.

Automating the tax transfer as a percentage of each payment received, which several banking apps now support.

Automating a base level of saving that is sustainable in a poor month, with manual additions in good ones.

And automating bill payments from an account that is topped up rather than from one that receives income directly.

The point

Worth restating.

Financial outcomes are determined more by structure than by discipline.

A person with modest income and a well-structured automated system outperforms a person with higher income and no structure, consistently.

And the structure takes an afternoon to build and then runs by itself, which is the best available return on an afternoon in personal finance.

General information only, not financial advice. Consult a regulated adviser or a free advice service about your own circumstances.