As the electronic age continues to evolve, people now more than ever are letting the details of their financial life zoom over information lines with little or no oversight.
While the freedom of not having to run to the bank on payday, or writing out the monthly check for the gas bill, is nice, is it worth the risk? And at what point are you too far removed from your finances?
There is no question that there are benefits to automating your finances. For example, automatically depositing your paycheck eliminates the likelihood of losing your check or having it stolen before you can deposit it safely in the bank. For those who have automatic deposits the check arrives, in most cases, safely and on time.
The convenience factor also drives a lot of automation in personal finance. In an age when most people barely have time to do what is necessary in a given day, alleviating some of the "need to dos" through automatic debits seems like a good idea. And in certain circumstances, it may well be — particularly for bills that have a set amount that needs to be paid each month, or bills that impose a hefty fine or interest rate penalty for late payment.
Automatic debits also can work to help force savings. For people who lack the discipline to actually write the check or manually transfer money to a retirement or savings account each month, auto-deductions or transfers to those accounts can help less disciplined individuals save.
With these advantages in mind, people need to determine for themselves when automatic financing becomes too much.
Automatic debits for bills that are variable may cause more problems than they can solve. Even with an automatic debit to your account, you need to carefully track what money is being withdrawn and to whom it is going. Often the convenience of automatic payments diminishes significantly when you find yourself trying to balance a checkbook full of transactions that have passed through your account with little or no oversight.
And errors? Imagine the overdrafts on your checking account if the gas company accidentally mixes up your bill with the business down the street and debits thousands of dollars instead of $50. For a lot of people, automatic payments transpire without regular checks for accuracy and can lead to huge financial headaches.
Your service providers also now become part of the out of sight, out of mind constituency. While you may still receive statements, the desire to switch services may seem like more of a hassle. For example, while you may be able to get a better long distance telephone rate with a competitor, it may not seem as obvious if you aren’t writing out the check each month.
Lately there has even been a trend that some experts worry may create a nation of people who are even further removed from their finances. Vendors have begun courting businesses offering their goods and services to employees through automatic payroll deductions, in essence getting even one step closer to an individual’s finances and perhaps helping consumers live beyond their means.
Automatic financing has benefits — that’s for sure. But like anything else it should be approached with a certain level of skepticism. Ask yourself if the benefits of giving up the control and oversight of your finances is worth the risks associated with it. Like most things in life, moderation is key.
Jim O’Neil is an investment executive with Dain Rauscher Inc., a member, NYSE and SIPC. These answers are for informational purposes only and should not be considered a recommendation to buy or sell any security. Send investment questions to Investor’s Forum, The Herald, P.O. Box 930, Everett, WA 98206, by fax at 425-339-3435, or via e-mail at economy@heraldnet.com
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