Wednesday, December 5, 2012

Rule #23 Automate all Monthly Payments

I have no idea when our bills are due.  I know they are due sometime during the month, usually near the end of it, but I dont fuss with checking the exact due dates anymore.   We have automated all but one of our bills.  When I say automated, I mean that we have set up an automatic payment either through the company itself or through our main bank to ensure the bills are paid on time.  We dont need to go stand in the long lines at bank tellers or ATMs to pay our monthly bills anymore because they come directly out of our accounts on the same day each month.  This way, we never have to worry about missing payments.  The payments are approximately the same every month, and the payment always comes from our checquing account, so we just make sure there is always enough in our account to cover the payment.  I find with money and bill management,  the path of least resistance with the highest amount of certainty usually makes the most sense, so making things automatic is the way to go for us.  No muss, no fuss.  This means we can focus our energy on other aspects of our financial planning instead of spending a couple hours a month in line-ups.

We do this with bill payments, debt payments (when we have any), rent, mortgage payments etc.  We have also applied this automating to investment contributions.  This is essentially the same concept of paying yourself first, automatically.  Each month, a set amount comes out of our account to go into our investments, and/or our savings accounts.  We have coordinated the timing of these particular withdrawals to coincide with our paydays.  The day that our paycheques go in our accounts, is the day the money comes out to make the contribution.  One thing about automating all our bills, debt payments, mortgage payments, and now investment contributions, is that when we look at our bank account balances, we know that most of the money in there is ours... it is essentially our discretionary funds... because all of our non-discretionaries (minus food) is, for the most part, already paid for.  We have learned to live without that contribution money in the first place so it never feels like the money is being taken out of our pockets.

By applying the Automatic Payment method to investments, we never have to choose how much we are going to save or invest that month, because we have already arranged for it to come out automatically.  The automating of the process of investing contributions essentially makes it a compulsory contribution.  It makes it habitual.  Inertia is huge in making a contribution, and anything that will increase the probability that you will continue investing in your financial security is a good thing in my book.

The benefits of automating one's payments are a plenty.  We never pay late fees because we are never late with payments.  If we go away for a week, we don't have to pre-pay any bills or dig through our mail when we come back to see which ones need to be paid right away.  Since our investment contributions are automatic, we know our future is being funded and don't have to carve off part of our paycheque because its already done.  Our credit rating is never in jeopardy because we didn't get a bill in the mail, made the wrong payment amount, or because it somehow got misplaced among the junk mail and went unpaid.  Lots of good reasons.

A the the end of the month, right about when I do our charting, I also leaf through the bills and see if there are any irregularities that may need addressing, but thats the only time of the month that I look through the bills.

There is one exception to this rule around automating, and that is with our credit cards.  Our credit cards may have additional items/services purchased on them from time to time and so an automatic payment doesnt suit us well in this case.  I check the balance every couple of days and pay it off completely.  I dont even wait for a bill to come in.... We treat our credits cards at 1-2 day loans, paying them off right away.  you can read more about how we use our credit cards here.

Tuesday, December 4, 2012

Rule #22 Pay your bills on time.. Every Time!


Want to know how to sabotage your finances in the foreseeable future? How's about screwing up your credit rating, while at the same time building up a deadbeat image of yourself?  Yeah, thats one of the worst things you can do.

It's funny how people do silly things that sabotage their financial wellbeing ... and by funny I mean strange.  An example of this is voluntarily harming their credit rating.  When I was in University, one of my roommates didnt have enough money to pay his cable TV bill but that didn't stop him from going out for a few brewskis with the boys.  Here's how one particular discussion went:

Ryan: "Hey man, your bill has been sitting there for a month... you gonna pay that? It was due last week."
Roommate: "I am getting my next instalment of my student loan in 6 weeks and I will pay it off then."
Ryan: "Dude, you cant just miss a payment.  Maybe you shouldn't be goin' out to the pub til you pay your bills."
Roommate: "They'll get their money, as soon as I get mine. I've done it before, no problemo."
Ryan: "That's gonna bite you in the ass someday"

Integrity is one of the traits that was ingrained into me as a kid, and it is one of my most valued traits in other people today.  Integrity to me means you do what you say you are going to do.  Its as simple as that.  And when you borrow money, you pay it back on the terms that you agreed to, or even earlier!  Growing up in my parents house the rule was: You only borrow money you know you can pay back and you ALWAYS pay your bills on time.  You always sacrifice discretionaries before missing a payment.  Always!  That was a given in my childhood household growing up and it is a given in our adult household today.  That includes bills, mortgage payments, loans, credit card payments, handshake loans with family etc...

Beyond having integrity, there is another good reason to pay your bills on time... maintaining a good credit rating!  When I was a teenager my parents taught me about a person's credit rating.  I've known about it and have been maintaining a good one all my life.  A credit rating is a metric used to evaluate your credit worthiness, or your ability and reliability to pay back debt.  Banks and other lending-related organizations share your income and debt history with each other in order to determine how much to lend you, what rate to lend it to you at, and the duration of these terms when and if you can borrow money at all.  The part you can control the most is how much you borrow and how you pay it off.

Let's focus specifically on the paying it back part and why you should care.  Your credit rating will suffer if you dont pay your bills on time... no matter what the reason, and in the end that hurts you more than anyone else the next time you go looking for a mortgage or a new car loan.  If you were buying a car on credit and you could only get the loan's interest rate at 7% while your brother-in-law was getting the same deal only at 5%, simply because you didnt pay your bills on time, you'd be kicking yourself.... or at least you SHOULD be kicking yourself.   Thats money you are leaving on the table.  If you have any money sitting in the bank and you are missing bill payments, you are likely ruining you future finances by acting so irresponsibly.  If your credit rating is the pits, it means higher interest rates that you are required to pay, or it may result in you getting turned down for a loan altogether.  Paying extra at a later month doesn't make up for missing a payment either, as some people I've talked to seem to believe.  If you ever want to borrow money in the near or distant future, the lender will absolutely be checking your credit rating first, so always keep that in mind when those current loan statements and bills come in the mail.

Come Hell or high water, we never miss a bill payment, we always pay our bills on time. Always.  As a result, we've never been turned down for credit when we've asked for it. and we get good interest rates on the loans that we do have.