Yesterday, I pulled up to an automated teller machine (ATM) in my automatic-transmission car, opened my automatic car windows, and withdrew cash that had been automatically deposited in my bank account on payday. I then used some of the cash to take my car through an automatic car wash, and when I arrived home, I used the automatic garage door button to close the door behind me. Then I walked into the house just in time to hear the dishwasher beep to let me know it had automatically shut off after automatically drying my dishes. (I just wish it would automatically empty itself.)
We live in a set-it-and-forget-it world, and in most cases, the convenience of automation is fantastic. But, when it comes to money, I’m a proponent of thoughtful automation, or “thoughtomation.” What I mean by thoughtomation is simple: Use automated investment and payment systems, but keep track of them and routinely reassess whether they’re working well for your financial goals. In other words, when it comes to your money, set it, but don’t forget it.
Let’s take paying your bills as an example. With automatic bill-pay, you can have your mortgage, credit cards, car loan, utilities, and other bills automatically debited from your bank account. Brilliant idea, right?
Maybe not. What if a company accidentally debits your account twice for the same bill? Does that seem far-fetched? Well, it happened to me—twice. And what if a waiter runs your credit card and accidentally makes a $10 tip a $100 tip?
Thoughtomation can save you time and money—just have a plan for checking that everything adds up. It can also help you meet your savings goals. A few months ago, in my It’s never too early blog post, I asked readers to share their guidance for young investors. Several readers described the importance of getting into the habit of saving regularly for retirement. For those of you with a payroll deduction option through work—401(k), 403(b), etc.—this is an easy way to set up regular, automatic saving.
Many companies are now automatically enrolling their employees in 401(k) plans, with the goal of increasing participation. While more employees are now taking advantage of such plans, there is a risk that the automatic contribution rate is lower than the amount employees would have otherwise chosen. According to an article in the Wall Street Journal, most companies that use auto-enroll plans set contribution rates at 3% of salary or less, unless an employee chooses otherwise. This is considerably below the 5% to 10% rates participants typically elect on their own.
According to the Employee Benefit Research Institute*, it’s likely that 10% or fewer of today’s twenty-somethings will get a monthly pension check or have employer-funded health insurance in retirement. As such, it’s now more critical than ever to start saving early.
Here’s where thoughtomation comes into play. For those of you working at companies with automatic enrollment in 401(k) plans, it’s worth the effort to check the contribution rate. If you can, increase it. If your employer didn’t automatically enroll you in a retirement savings plan, sign up. If a 401(k) or 403(b) option is not offered to you, consider setting up a traditional or Roth IRA. Check out Vanguard’s resources on choosing an appropriate retirement vehicle.
Now, if only the money could be automatically earned …
* Emily Brandon, “Five retirement tips for 20-somethings,” U.S. News and World Report, April 2006.