Once you have a reliable handle on your monthly expenses and income, you should be able to look ahead to your future bills and be aware how much you’ll need to cover them as well as how much you can save or use to pay down debt.
The great next step to take is to start automating your financial life. You should try to set up auto-bill payments on everything you can and set up automatic transfers on savings. You’ll have the peace of mind of knowing that you won’t miss any payments or get charged late fees, and that you can take a vacation or a long weekend and not worry about whether you paid the mortgage or the credit card bill.
How The Money Flows
Personally, my wife and I use a shared checking account as the place we do direct deposit of our paychecks. This account serves as the initial holding place for our cash and the account from which we pay our bills: mortgages, credit card bills, utilities. I then set up a series of automated transfers and deposits based on my current savings goals. While building up a cash cushion for emergencies or anticipated large expenses (like our current bathroom remodel), I’ll set up bi-weekly transfers over to a “high yield” or “high interest” online savings account (Capital One 360). I have a good idea of how much I can save each month, so I simply cut that in half and schedule the transfer to happen after each paycheck.
When I have an adequate cash cushion and don’t anticipate any larger expenses like remodeling, Christmas shopping, or buying a used car; I’ll start automating a deposit into my brokerage account at Fidelity. You can even automate buying mutual funds and stocks through that account, to make it super-simple to dollar cost average invest.
The point here is that if I’m on traveling for work, or we decide to take a vacation I know that my finances are taken care of. Having this set up also forces me to have a realistic view of my cash flow. If you’re transferring too much, you’ll see that your checking account balance dwindles over time (the goal here is to save all we can, so ideally your checking account balance at the beginning of each month is that same as last month). Likewise you’ll see if cash is piling up, then you need to bump up the savings transfers. A side benefit of this practice is that psychologically seeing a smaller balance in our checking account (enough to cover a month’s worth of expenses plus a small cushion) will help avoid spending more freely. If you’re constantly sweeping away your free cash to another account, you’ll get used to a smaller balance and shop accordingly.
Setting up Auto Bill Payments
Many banks will offer Bill Payment or “eBills”, though beware that they like to charge for this privilege. Credit card companies typically offer a way to set up an automatic bill pay withdrawal from a checking account. DO NOT SET IT UP TO PAY MINIMUMS! Ideally you want it to do full balance payments – we don’t want to be paying interest or fees here.
In most cases you will have two options for setting up bill payments for any given payee: through your bank’s bill payment, or through the payee. It’s a matter of what’s available and what you’d prefer, though the convenience of doing all of them that offer it through your bank’s bill payment system can be very useful to get a more centralized view and management of them.
I’ve found that the more difficult bills to get automated are usually utilities or services. My local municipality’s electric company has an online bill payment website, but doesn’t offer automated bill payment there themselves – but you can fill out paperwork allowing them to set up automatic direct debit payments. The local water supplier is much the same way – they don’t offer automated bill payment themselves, but can do “eBills” through my bank (or offer the same sort of mail-in application for direct debit). The garbage pickup company sends out paper bills and asks for paper checks, but since the bill is regular and the same amount, I’m able to set up a recurring auto payment through my bank’s bill payment system (I had to enter in the payee, address, my account number and some other details). As a last resort you can always call up the company and ask if there’s a way you can set up direct debit using a voided check.
I’d recommend that you begin by setting up direct deposit into a checking account and then automating your largest and most important bills: mortgage/rent, utilities, phone, internet, etc. Once you’ve got your bills automated you can look back at the previous month’s starting balance and this month’s and estimate the amount of money that you can automatically transfer off into savings. Remember, the idea here is to make sure your finances are on auto-pilot. You don’t want to set up automatic savings too high and end up having a zero balance in your checking account.
Finding The List of Bills to Pay Automatically
I don’t know about you, but I have a pretty large list of bills that come monthly or on a much less frequent basis. It can take quite a while to get them all set up. The easiest way to make a checklist of them is to go through your checking account and look for any entries for paper checks in your transactions. Over the long term you want paper checks to be extremely rare things, so that they stick out like a sore thumb when they show up in Mint or your checking account listings. Every time you see one, see if it is a bill that is a one-time thing or regular. If it’s regular, go to some lengths to automate it. You may not be able to get every single bill automated, but it doesn’t hurt to try.
There’s also a nice post on Gaming Your Finances about automating your budget, where he uses more savings and checking account to separate out his finances between variable, fixed, and discretionary expenses as well as emergency savings and long term budgeted savings for goals.