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Automatic vs Automated Finances – A distinction that makes a big difference

Remember Mia, one of my Women’s Money Group members? She has appeared in my newsletter over the last few months courtesy of her regular emails to me with interesting comments about financial management, investing, habits, and mindset challenges.

Today, she’s back with more thought-provoking material. Earlier, I issued a challenge to my mailing list about their financial goals. Here’s what Mia had to say:

Your call to action was to decide what I wanted my money to do for me in the next four months. I’ll admit that this had me stumped. What IS my biggest priority? You said not to move forward on automatic and though you suggested it meant using money haphazardly, I feel that I’ve automated a lot of good habits, I’m making progress, I’m still debt free-and saving for retirement (and – now that I’ve moved and had some of my furniture ruined – I’m saving for new furniture when I leave B.C. 😒 ).

It feels wrong to say I want to increase my savings so I can have a holiday to celebrate my [milestone] birthday, for example – and then I thought ‘I felt shame when I was poor and had no money, how can I have shame now that I do? Why am I comparing myself still?’ Has this topic come up before with the values work, maybe? (Let’s not talk of the creeping existential dread over this birthday, okay??)

There are many great nuggets in Mia’s email. Let’s unpack them.

 

Automated Finances

One of the financial strategies that I teach in my Take Charge of Your Money course is to automate as much of your finances as possible. Very simply, this means setting up processes inside your banking system to ensure that positive behaviors happen automatically.

Remember my post on cognitive fallacies to which we often fall prey when making financial decisions?  Automating good financial behaviors is a way to by-pass the tendency to be influenced by those fallacies.

Here are some examples of helpful automation:

  • Ensuring that your salary or wages are automatically direct- deposited into your chequing account. This minimizes delays in getting access to your funds and it permits you to set up the rest of your automated system, since you know when the money will be in your account.
  • Setting up Preauthorized Debits/Payments for bills to ensure that you never incur a late payment. You can do this for rent, credit cards, utilities, phones, internet services, and most of your other bills.
  • Creating automatic transfers from your chequing account into your savings the day after you get paid to ensure that savings happen. If you leave your savings to the end of the month, the money has a higher likelihood of disappearing into a spending vortex. Successful savers set up structures to bake in the savings habit; they don’t leave it to chance.
  • Setting up transfers from your savings or chequing account to your investment account. If you invest in index funds, you can also automate the investments. If you invest using Exchange Traded Funds (ETFs), you then need to go into your discount brokerage account to make the purchases; only part of the process can be automated. Still, if the money is in the investment account, it’s not in your chequing account acting as a temptation to spend.
  • Choosing a DRIP – Dividend Reinvestment Plan – for your cash dividends.

There are many ways that you can create systems to bypass inertia, as well as the effects of behavioral biases, to reach your financial goals more quickly. Automation is good, however you can’t just take a “Set it and forget it” approach. Well, actually, you can, but you may not be happy with the results. The next step is to review your financial choices on a regular basis to ensure that you’re remaining congruent with your values and on track to reach your goals.

 

Versus Finances on Automatic

This is the source of Mia’s confusion, and fair enough. She interpreted my usage of “automatic” to mean haphazard financial choices, whereas the automation she implemented in many aspects of her finances yielded great results. What’s the problem with automatic finances given the outcomes?

As I mentioned above, automating parts of your finances is an effective way to accomplish your goals more quickly than simply trying to implement all those steps yourself. However, when I refer to automatic finances, I’m talking about putting your money on autopilot, an issue I discuss in this blog post.

Bear with me as I get picky about language. I know from experience that the language you use matters a great deal when it comes to how you feel about your money and, consequently, the results you get.

 

Automatic = Autopilot

When you automate different aspects of your finances, such as bill payments or investments, you set up recurring, digital systems to take care of outcomes that are net positive for your financial goals. Bills always get paid on time; savings happen at a predictable rate; your nest egg grows with regular cash infusions to your investments.

When your finances become automatic, it’s like turning on the auto-pilot switch. You go through your days unconsciously behaving in the way you always have without much thought about how much you’re spending, or without regularly reviewing where your money has gone. One year flows into the next as you maintain your financial status quo, with the net result being an awakening five to ten years later when you realize you’re no closer to your goals, or worse. You shake your head and wonder, why am I still in debt? Where’s the growth in my investments that I expected to see? Why doesn’t life feel any easier?

 

Who’s the boss?

When it comes to your money, the buck stops with you. Literally!

Seriously, you’re the boss of your money. If you want it to be a good employee, you need to give it guidance and to check in regularly to ensure that all is well. The latter entails regularly scheduled “Revise and Review” sessions. There’s a reason that the last step of my 7-Step Plan to Master Your Finances is called “Review and Revise”: you can do everything right to put yourself on the path to financial success, including automating key aspects of your finances, but if you then allow the process to proceed on automatic, without regular oversight, you’ll probably veer off course.

First, automate.

Then, review regularly. Don’t let your finances drift into automatic mode.

Here’s what happens when you take charge of your money and keep a close eye on it: you save money, like this woman who freed up $845 dollar per month. That works out to more than $10,000 per year, every year, that she can put to better use. How cool is that?

Some questions to ask during your review:

Are you putting enough money in your savings? Will your savings rate get you to your target number in the time frame you want?

Is your money growing at the rate you want and need it to? If not, what needs to change?

Are you making the kind of progress you desire on corrosive debt?

Do you know exactly where your money is going and in what proportions? Is that distribution of funds in line with your values?

 

Be deliberate

To crank up the odds of success, focus on conscious, deliberate choices with your money. What does that mean? It means you don’t need a complicated plan; you just need to be clear about what you value and what your goals are. Then, set aside a bit of time every month to track your spending, saving, and investing. If you’re happy with your progress, carry on. If not, make some adjustments to whichever category needs attention.

For those of you working on getting out of debt, I wrote a post outlining the step-by-step process here.

 

About that creeping existential dread

The day of my 30th birthday, I felt depressed. My (late) husband, Malcolm, was undergoing treatment for cancer, again. I didn’t know, then, that roughly two years later, I would become a widow.

At the time, I was working crazy hours in a business I hated – his business. I felt frustrated, scared and trapped, though I hadn’t articulated those feelings yet.

After another long day doing work, I stopped by the liquor store to buy myself a bottle of wine. There wouldn’t be much of a party, but I would at least have a decent glass of wine.

The guy working the cash, who looked like he wasn’t a day over sixteen, paused before ringing in the purchase. “Can I see some I.D. please?” he asked? I just blinked at him. “You’re kidding me. Today is my 30th birthday,” I replied. I was tired and grumpy. I just wanted to get home.

Now, someone I could almost have given birth to had asked me for I.D.

“I still need to see your I.D.,” he insisted, so I fished it out, showed it to him with that look on my face – you know exactly what I’m talking about, here – and I went home with my purchase.

 

Glass half empty

I wasn’t pleased that at thirty, someone wanted to see my I.D., nor was I flattered.

At that moment, I just saw the down side: a young twerp slowed down my ability to park my tired body in a comfortable chair, with a nice glass of wine in hand. I didn’t want to think about my life: about where I was versus where I thought I would be by thirty; about what lay ahead.

All of that was too big and too scary at the moment. Nope, no big thoughts for me. All I wanted was a bit of comfort and relaxation on my birthday.

 

Be careful what you wish for

It wasn’t until after Malcolm’s death that I started to take a whole, new look at birthdays, particularly milestones. Even if we’re not at all happy with where we’re at or what we’ve accomplished by a certain age, what’s the alternative – no more birthdays? As in, death?!

And why do we look ahead with dread? Is it because we feel our best years are behind us? If that’s how we feel, what does that tell us about our view of life right now?

Here’s what helped me re-frame my thinking about birthdays and the passage of time: It took the loss of someone I loved to realize that life is a gift.

This may sound like a tawdry greeting card, but it’s nonetheless true for me. I view every, single day as a gift that brings with it the opportunity to experience joy, wonder, courage, accomplishment, excitement, grace.

You’re in the driver’s seat. You get to choose your experience.

If, for one second, you think you’re too old to accomplish much, start looking for examples of people who knocked it out of the park in the latter half of their lives. Here’s a list to get you going.

 

Your turn

How does the distinction between automated finances and automatic finances show up in your life? Share your thoughts with me. I’d love to hear from you.

As for Mia, here’s what I told her:

Save for a damn birthday party/trip. In fact, have a party AND a trip. You’re turning [X] – that’s awesome. Yes, it is awesome. To every woman who feels dread of any kind when it comes to being one year older or reaching a milestone, I say, “Well, isn’t that interesting? Let’s unpack that.” Consider the alternative. Would you prefer to have your headstone mark the end of your life at [your current age]? That’s effectively the message we’re sending the universe when we say that we dread turning [X] (or whatever age).
 
Embrace every single year for the amazing blessing that it is. You got another year on the planet and, now that you have more experience/knowledge/wisdom, you can rock it even more in the years ahead. Your job on this planet is not done, not by a long shot. Plan a memorable party/trip/whatever that will make you look back with joy and smiles. 
 

Related post:

A Tale of Loss Aversion and Sunk Costs: Mia and Her Cappuccino Maker

 

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