Automatic Payments Got You Down?

Maybe you see it coming. On, say, the 14th of the month, you take a peek at your checking account balance - and it's too low to cover your automatic withdrawal on the 15th for one or more of your regularly scheduled bills. You watch helplessly as the withdrawal bounces, you get hit with a fee, and are now stuck with the job of scraping the money together and manually paying that bill somehow. And the fees are usually killer and manage to put you in the hole deeper, especially if the automatic withdrawal tries a second time before you can fix things.

Of course, the best way to avoid this is great planning. One thing I do obsessively is watch the direct deposits for paychecks - I know the schedule for them and try to plan it out as compared to my automatic withdrawal bills and my regular, manually paid bills. It can be tough, though, to avoid spending down your bank account on unexpected necessaries (or even expected ones), unless you are very disciplined.

My previous methodology usually worked - until it didn't. That's when I decided to do something a little tricky to set up, but worth it for the lack of hassle later on. So I thought I would share it. My idea is not for everyone, but it might be worth considering. (Full disclosure: CTI Family Finance Solutions nor myself officially endorse this method or take responsibility for your use of it, this is my sharing of my personal experience only.)

I've written before about how I prefer a local credit union for my banking needs. For one thing, it's a non profit, so all profits made by your loans and credit cards go back into lending money to its members, and the rates are usually lower and more reasonable on everything from car loans to mortgages, personal loans, and credit cards...and credit union checking accounts usually have free checking and even yield a bit of interest for you.

As time wore on, I found myself facing a lot of automatic withdrawal bills, or things I'd rather be paid automatically by setting up my own bank's bill pay (like mortgage). For instance, my car insurance insisted on being paid from automatic withdrawal, as did life insurance, a personal loan from my credit union, and my membership at the local Y. The dates vary but not according to my convenience of course!

So I went to my credit union to see if I could open up a second account. A "spending" account which would cover daily expenses and manually paid bills. We've always had direct deposit for paychecks, and my credit union has the ability to automatically move money around from that paycheck. Not all banks or credit unions do this as far as I know, so check with your bank.

Half our personal loan payment is taken right from each bi-weekly direct deposited paycheck itself, and goes to pay down the loan. (This helps me also reduce the interest I pay over the life of the loan, since half my payment is far earlier than the due date, so the loan isn't hit with as full of an interest debt.) Then, I carefully - very carefully - calculated the amount I needed to cover the things I needed or wanted to pay automatically, like car insurance and mortgage. Each paycheck that comes in via direct deposit, a certain amount is assigned into my old, now untouchable, account. The rest of the direct deposit, whatever is left, goes to the new spending checking account to be used for regular expenses and other bills.

I calculated the amount to assign to my old account for automatic payments by adding up all my automatic payments in a month, then dividing by two since I have two paychecks a month minimum coming in. That's the amount you need to cover your monthly automatic expenses. Make sure you do this in a pay period ahead of when things need to get paid - two paychecks need to go through until you have enough money for a whole month's worth of expenses. Time it carefully, or leave the old account with half the monthly total already in it.

So what's the catch? Well, it's enforced discipline - especially if you "lose" (figuratively) your old check book and old credit card somewhere in your own basement and never ever spend from it. You will never have the automatic-withdrawal-problem again. But, it does take careful setup and you need a bank which can accommodate moving your money around like this, as well. So it might even require switching banks. Finally, the "whatever's left over to spend" second, newer account, you might find, does not have enough money to cover everything else. After all, if you always had enough money, you wouldn't ever see an automatic withdrawal bounce, would you? That means very careful budgeting of everything else you spend, and evaluation of what you really can afford in your life. I can tell you, having done this, I did a budget of all the "regular bills and expenses" and was pretty humbled, realizing I needed to plan better.

But if you can manage the setup, and you stick to it (no cheating by taking cash out of your old account in an emergency!), there is a peace of mind knowing that there will always be enough money around for your automatic withdrawal bills, and what's left (manual bills) you can worry about separately and pay a little more flexibly without worrying about the dreaded automatic withdrawal dates.

What's really amazing about this method is that there are 52 weeks in a year, so that means 26 direct deposit bi-weekly paychecks. Since I only need 24 paychecks to cover all of these bills (12 months in a year times 2 paychecks) at the end of the year I have an entire month of payments left over. What I do with that money - maybe pay down a credit card, buy Christmas gifts (though I have a Christmas Club account which regularly gets filled too!) or fix an ailing car, is up to me - but I'd rather have the problem of extra money at the end, than not enough!