Legions of personal finance writers have written about the importance of automating your savings in order to save automatically. You know, without you actually having to log in to your bank account or write a check to do it. The big benefit of making your savings automatic is that it happens monthly or weekly or bi-weekly or however often you choose and you don’t have to lift a teeny tiny finger to do it. You can be sick in bed with the flu or on vacation in Jamaica and still be saving money (and increasing your net worth) if you have an automatic savings plan set up.
How to Increase Your Net Worth
Increasing your savings obviously can have many benefits; you can accumulate money to save up for a car or a down payment on a house, invest it, or just use it to beef up your emergency fund. However, if you are interested in increasing/improving your net worth (which is the total value of your assets minus the total value of your debts/liabilities), there is actually another variable that you can use automatic transfers for, and that is your debt repayment.
As I have mentioned in previous posts, the hubs and I have recently entered turbo mode on our debt repayment. We want to get rid of our student loans as soon as possible, and in order to do that we are speeding up our debt payoff using automatic payments.
Automatic Debt Payments
How does that work exactly? Well, our student loan payments are due once per month. But we get paid every two weeks. So we make a payment on our student loans every time we get paid. That means instead of making 12 payments per year, we make 26 payments per year. And like I said, we’ve recently entered turbo mode on the debt repayment, so right now we are making 26 full payments a year- by doing this we’ll be shaving YEARS off our expected debt repayment. As a matter of fact, we are hoping to be rid of our student loan debt within two years if we can keep up this pace. There are a few variables that may alter the expected course; for example, right now we are trying to adopt and we have a certain amount of money set aside for that. But if adoption ends up costing more than we have set aside we may have to funnel some of the debt repayment funds toward that instead. But overall we are now dedicated to getting rid of the student loan debt as soon as possible.
We really like making automatic payments on our debt for the same reasons why we like automatic savings: it happens automatically. We don’t have to think about it at all. Our debt repayments go out at the same time as our automatic savings draw, which happens the Monday after we get paid (we always get paid on Fridays).
So can you do something like this if you don’t get paid every two weeks? Of course you can! You might have to get a little more creative with your budgeting if that’s the case. But you could still set up a system where you either just automatically send out one large payment a month right after you get paid (I personally think it’s easier to “pay extra” on debt if you do it right away after getting paid, at the same time you send money to your savings if you do that), OR you could set up weekly or bi-weekly debt payments. But the huge benefit of making the extra debt payment right away is that then the money is already out of your account and the decision to pay or not pay extra on your debt is not left up to “well let’s see if we have enough money left at the end of the month.” Most people will not be very successful at making extra debt payments that way. By automating both your savings AND your debt repayment, you can automatically increase your net worth. Every. Single. Month. How awesome would THAT be?
These days the internet has made it easier than ever to keep tabs on your net worth. If you don’t want the hassle of tracking down all your numbers and creating your own spreadsheet, the best FREE online resource that I know of to help you monitor your net worth is Personal Capital (review here). Even though we’ve long kept our own net worth spreadsheet, I also have an account with Personal Capital. It’s a terrific resource to help see where your money is going and establish a better budget, as well as better plan your retirement savings strategy. And it’s FREE- doesn’t get much better than that!
Does anyone else use automatic debt repayments? What other methods do you use to pay extra on debts?
Suggested Reading: If you are interested in reading more about awesome ways to automate your financial life, I recommend The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich
P.S. If you liked this post, you might enjoy using our free Net Worth Calculation Template. Sign up now to receive each new post delivered to your inbox, and we will email you the template! Sign up here.
Photo Credit: Money in a plant pot, by Taxrebate.org.uk, creative commons (license), 11/1/15, with changes
Great idea! We don’t automate debt repayments now that we’re debt-free, but we used to have all kinds of things automated. It really does make a difference when you don’t have to think about it. You don’t accidentally spend that money somewhere else! =)
Exactly! It definitely helps that it goes out right away, too- then the money is already out of the account so there’s no temptation for it to go to something else.
Currently I only pay the minimum on my debt and don’t really plan to change that. My plan right now is to continue to build an emergency fund and save for things that I know are coming up (i.e. our two aging cars that need replacement, my wife’s tuition for her masters degree, etc.). I plan on continuing to focus on increasing my income and using the added income to pad my finances.
I think that’s a good plan. I don’t think we would be accelerating the debt repayments if we did not already have our emergency fund secured. This is our next step toward financial freedom!
I think this is a great idea especially if you are focused on decreasing your student loan. My client did this with her loans, and we saw that the first payment was split 50/50 between principal and interest, but that second payment was split 92/8 between principal and interest so she is really eating away at her student loan debt faster with that extra payment.
Yeah, we are really excited about it. Currently we are set up for a 25 year repayment plan (something like 17 or 18 years left), and we have just gotten sick of making zero progress on paying it off. Using this method we will be out of debt MUCH faster!
I don’t have my extra student loan payments automatically deducted, but I am pretty diligent about sending some over when I get paid. The reason being that I kind of like to determine the “extra” amount by what I’ve already spent that week. I had an unexpected car repair cost, so I likely won’t be sending much this week. I also get overtime sometimes, so I’ll increase it then. It is a great idea for those that can afford it, though.
That makes sense. We have a small savings account (outside of our main savings account) that we draw from if we have extra things like car expenses come up during the month, otherwise we probably would not be able to automatically send money toward debt repayment. It sounds like your method is working well and it also sounds like you have some awesome dedication toward getting rid of the debt- kudos to you!
We use automation to continually save month after month. We simply transfer money from our checking to savings once all the bills are paid. Once our debts were gone it continued to be a great way to stay focused with savings and build that emergency fund.
Awesome! I think automation is the coolest thing about online banking. So much of our banking now happens without us having to do a thing- it’s really a great way to make progress with your finances!
I have been really considering automatically withdrawing my smaller loan payment. This has me even more so wanting to do it. I also will get a .25% drop in my interest if I make automatic payments. I’m curious if they will let me set it to the amount I want to pay or if it will be just the minimum due that will withdraw.
It sounds like you are talking about automatic withdrawals, which is slightly different than what we are doing. Instead of handing over our bank account info to the student loans companies, we are arranging our own payments to go out through our bank. The difference is that we have a lot more control over what we are doing- if something were to change with our finances I could easily go in a change the amount going out, the date it goes out, stop it altogether, etc. With automatic withdrawals your lender automatically pulls from your account every month. I think it involves calling your lender if you ever wanted to change the setup. We avoid automatic withdrawals for that reason, although the break on the interest rate would be nice.
Automating is a great way to save AND pay bills/debt. But I would recommend logging into the bank account every so often too to make sure accounts haven’t been overdrawn or there aren’t any incorrect charges.
Good tip! I do that nearly every day, and sometimes I make adjustments to the amount going toward debt repayment if our income for the two week period is lower or higher or if we have more or less expenses, etc.
I don’t automate debt repayment, but it is the first bill I pay. I am always anxious of automated pulls from my account after a nasty extra payment that got taken, and took forever to reverse.
Good luck with your intensity 🙂
I really dislike automatic draws- that’s not what we do. We just set our bill payment settings within our checking account for extra payments to go out. I try to avoid automatic withdrawals if at all possible, for that reason. I just worry that if I hand over my banking info to our lenders that it will be misused or that mistakes like that could happen.
I actually don’t automate too much of my finances. However what I’ve done instead is try to ensure that as many bills as possible are due in the first few days of the month. As I get paid at the end of every month (within the last few days depending on holidays etc.) it makes paying my bills quite easy.
Around the end of each month I simply log into my bank account and spend a few minutes paying all of my fixed costs for the month when my bank balance is at it’s highest. While I was paying off debt that also included making debt payments – over the minimum and while I still felt “flush” from payday 🙂
Even though I had the same amount of money each month, psychologically it was far easier to pay extra off my debts when I had plenty of cash after payday than leaving the bills until they were due and my current account balance had dropped considerably.
I also find that this process makes me sleep easier knowing that all my major bills have been paid straight away (this includes transferring money into savings) so I don’t really have to budget too much – I know that what is left in my account then has to last. And by gently increasing my savings over time I’m forcing myself to be more frugal over time without the annoyance of a budget 😉
Sounds like an awesome plan! I agree, it is psychologically easier to make those big payments right after you get paid. The biggest reason that we do it though, is so that we won’t be tempted to spend the money elsewhere.
My entire financial life is based on the 2 week pay cheque. I pay all my bills every 2 weeks instead of every week.
I do chose not to have any direct deposits of bill payments because I enjoy figuring out, down to the penny, how much I can put toward savings and debt. I have a plan and I stick to it.
That’s great! We really like making debt repayments every time we get paid (which is every two weeks), I think we are putting a lot more money toward our debt this way. We haven’t done it for our electric bill and stuff like that, but with the big things like our mortgage, student loan payments, and savings, it has been hugely helpful.
I’ve never done the automatic debt payments, but I love automatic transfers into my savings account. But I definitely don’t let any companies automatically draft from my bank account, as I’ve had one too many bad experiences with Verizon, Comcast, and the like.
I totally hear you on this one! I try to avoid automatic withdrawals as much as possible. For one, it just makes me nervous to hand over my bank account info like that, but secondly, I always have the worry that if I ever need to stop or change the payments it will be impossible. I guess I am sort of a control freak, I just don’t trust companies like that to have my banking info.
I consistently monitor my net worth, but I do it through aggregator sites online like mint and personal capital. Especially with personal capital, they will tell me how much money has come in and how much money has left in the last 30 days, which I think is a very effective feature for planing. However these are very useful ideas please keep sharing 🙂
That’s great! We have not ever used those sites, but I have heard lots of good things about them. I think the important thing is to find a way to keep track of your net worth and monitor it on a consistent basis.
Exactly! Its less important that what method you have been chosen but its more important that you are updated about ur money…