Make the Right “BIG” Decisions – Automate Payments (pt. 2 of 5)

By Olivia Sandham

Last week, our blog discussed how making small financial and health decisions and changes might not work, because many small changes are either sacrifices in disguise, or the effort outweighs the outcome.  So this week, let’s take a look at the first and most extensive financial “BIG” decision that can be made with little effort and sacrifice, but can have “BIG” results.

A U T O M A T E    P A Y M E N T S

Setting up automatic payments for any type of recurring financial debit or credit can be a very beneficial decision for your financial situation.  Here is a list of many of the types of payments you could automate.

Directly deposit your wages from your employer into your bank account
Automatically pay:
- Rent/Mortgage
- TV/Cable/Internet/Cell
- Utilities
- Subscriptions
- Insurance
- Credit Cards
- Savings
- Investments (such as an Individual Retirement Account)

Benefits:

• No more missing payments or making mistakes on payments.  Set up automatic payments correctly and your payments will be on time and in the exact amount you want.  With direct deposit, your money will be in your account around the same time every pay period.
• More time for the other aspects of your life.  The amount of time it takes to set up and monitor an automatic payment (which you only have to set up the ONE time) will most likely be less than what it takes to collect, open, sort, and file the bill you receive in the mail (a process that occurs every month), and that doesn’t even include the time it takes to write the check, tear off and fill out the payment stub, stamp and fill out the envelope, and put the envelope in the mail (whew!).  Also, setting up a one-time direct deposit or automatic savings/investment payment can save time and hassle of frequent visits to the bank to deposit checks or transfer funds.
• Save money.  You could save on checks, envelopes, ink, stamps, and the cost of fuel used for trips to the store for these items, or the bank to make your deposit.  Plus, some institutions offer better account options, waive certain fees, or supply rewards or other benefits for having automatic payments/deposits or emailed statements, because it saves on their bottom line since less paper and less labor is needed.
• Making full payments - on time, every time - will help your credit score.
• Eliminating all that paper and driving saves on the environment.
• Finally, automatic payments have the flexibility to update, change, or cancel your payments with just a brief phone call or a few clicks of a button online.

Effort:

1. If you are interested in direct deposit from your employer, talk to your Human Resources department.  For most companies with direct deposit, all you need to do is fill out paperwork and supply them with a voided check, deposit slip, or letter of authorization from your bank.
2. In order to set up automatic bill and investment payments:
• You will first need the information for accounts you wish to automate (found on your bill or statement).
• Next, you will want to either 1) Contact your bank and set up online bill pay, or 2) Contact the companies through which you have recurring payments and set up automatic bill pay.
• Any of these steps can be accomplished by making a call to customer service, or setting up automatic payments online.
3. Where possible, you may want to consider switching to companies which DO allow automatic payments.
4. Of course, you should monitor automatic payments to make sure they are the correct amounts occurring at the correct time.  Log into your online account and look at the most recent transactions.  Remember to watch your balances, because you wouldn’t want to overdraft your payment account, or overpay a bill.
5. For the savvy and experienced auto-payer, you could consider using a rewards credit card to pay your bills, and then pay off the full credit card balance every month.  This allows you to earn points/rewards while also making a few monthly payments from your checking account.  Again, this is ONLY recommended if you pay off the credit card balance in full every time you make a payment, because you DO NOT want to build up any more debt.

 

Next week, we will take a look at more of our financial and lifestyle “BIG” decisions that can have “BIG” results with little time and effort.  Stay tuned!

Could Your Tax Refund Be Costing You Money?

Time Business & Money posted an interesting article earlier this week titled “This Simple Tax Error Is Costing You $2,800”.  The article covers the relevant topic of tax refunds and discusses how having a large tax refund could actually be detrimental.  Read below to review key points of the article, or click here to read the article in its entirety.

Did you know?  Over 68% of Americans prefer to pay more taxes than they owe so they can receive a larger tax refund.

The average tax refund for 2012 was $2,803, which means an overpayment in taxes by about $54 per week per individual.

It seems many people use overpaying into their taxes as a sort of “forced-savings plan”.  Over 2/3 of those who receive a tax refund choose to either save/invest it, or they use it to pay off their debts, rather than simply spending the money.

Unfortunately, nearly 50% of people who pay the correct amount in taxes throughout the year, and thus have more take-home pay, actually end up spending the extra money rather than saving or investing it.

So what is the recommendation?  Pay the correct amount of taxes throughout the year and set up an automatic monthly withdrawal for the additional money.  The funds can either be transferred into a savings account or it can be used to pay down debt.

In a savings account, the money will earn interest, whereas sitting in Uncle Sam's pocket until tax-time earns you nothing.  Also, these funds will be accessible if needed for big expenses or an emergency situation, which will also help to avoid increasing debt (with high interest) to pay for these occurences.

Another option is to transfer the funds to pay down debts, and thus lower interest charges.  This maneuver could actually add up to an average savings of almost $200 a year, which can make a huge difference over time.

HOW TO: Save Money and Pay Off Debt

By Olivia Sandham

Although the two don’t seem to logically go hand-in-hand, saving money while also paying off debts is certainly possible.  With a few simple adjustments to your lifestyle and budget, you can create a comfortable and debt-free future.

 

The first step to saving while paying off debt could be to create a household budget that trims unnecessary expenses.  This budget will only be feasible if it allows for some discretionary spending to avoid feeling trapped or “broke”.  Examples of areas that could easily be trimmed without too much lifestyle shock include eating out one less night a week, consuming one or two less high-priced beverages (such as cutting back on a latte or cocktail), and switching groceries to generic brands.  Think about how much you could save each week by making these changes, then multiply that by 4-5 times per month!  These small changes can certainly impact the amount of additional money you will have to put toward paying off debts and increasing your savings.

 

The second step to saving while paying off debt is to consider designing a debt payoff strategy that best suits your needs.  Paying off debts utilizing the “snowball” effect is a popular method of paying your debts in a specific order.  You could choose to either 1) Pay off the smallest balance first, which can be motivating in a short period of time because you see the number of debts you owe drop, or 2) Pay off the highest interest rate first, which makes the most sense from a pure financial approach, since you will keep more of your money in the long-term.  Choosing the best debt payoff strategy will be a personal choice so that you find a strategy that you will want to maintain over the long-run.

 

The last step to saving while paying off debts is to build your emergency fund and future investments.  Once you have designed a trimmed budget and chosen your debt strategy, you can plan to have additional money placed into an easy-to-access emergency savings account.  Although this account will not produce much (if any) interest, there will be no penalty for taking the money out should you absolutely need it.  However, once you are able to build your savings to a sufficient amount (three to six months of expenses is typically recommended), you can then start to invest part of your monthly additional money into accounts that will produce higher return rates, such as an investment account or an IRA holding diversified mutual funds.