Ten bucks a month to Netflix, $5 for cloud storage, $10 for a music subscription, $50 for a gym membership—it’s so convenient to sign up for automated debit or bill pay and have one less thing to worry about when it’s time to pay bills each month.
It’s also a lot easier to lose track of how much money is being spent each month and that loss of saliency is troubling at least one economist who says automated banking is contributing to a decline in financial literacy.
“One thing we know from behavioral economics is the issue, particularly in this day and age, is that mental arithmetic is horrible,” said economist David Bieri, associate professor of economics and public policy at Virginia Tech.
“You add on your cable, you add on your cell phone, you add on this that and the other and, before you know it, you’re committed to spending $1,500 a month without realizing that you are,” he said. “I think it’s all of these small, regularly recurring financial commitments that eat into our budgets that essentially mean we have such a terrible time keeping track of how much we’re actually spending.”
Forgotten Accounts Quietly Adding Up
Meet Andrea Osher of Voorhees, New Jersey. She admits that she has signed up for automated billing and then completely forgotten about it, even paying for services she was no longer using.
“I moved at the end of 2015 and didn’t realize until the summer of 2016 that I was paying for a newspaper subscription that was being sent to my old address,” she said.
“Another issue I had was a gym membership that I thought was over and it continued for a few months before I reviewed my credit card statement and realized I was still being charged.”
A growing number of companies are offering, even pushing for automated billing for everything from utilities to computer software that was once a one-time purchase for the life of the computer, but now requires a yearly renewal.
According to the 2016 Consumer Billing Preferences Survey from Fiserv, 61% of online U.S. households paid at least one bill via an automatic debit from their checking account in the month prior to the survey.
“Tally up how much are you committed to having spent already before your paycheck comes in.”
“The corporations know how to finally get into our wallets,” Bieri said. “And so I think that’s much more of a financial literacy issue for people to actually sit down and tally up how much are you committed to having spent already before your paycheck comes in.”
Sometimes, it’s not even the dollar amount that frustrates consumers, but rather the irritation of forgetting they were being charged.
“My business pays all web bills automatically,” said Melanie O’Connor, a teacher who also runs a wedding photography business out of her home in East Granby, Connecticut. “I was paying 99 cents per month for an account that I hadn’t used in years. I realized what happened when my debit card number switched and I got an email telling me my card was declined and to update my info. I didn’t notice 99 cents per month, but after a few years, I wasn’t happy about it.”
Convenience vs Budget
Of course, there are perks to automated billing. It often eliminates the possibility that you will forget to pay your bill and be charged late fees. Also many companies, including paying student loans with Earnest, for example, offer a discount when you use automatic billing. With Earnest, you receive a 0.25% discount with autopay. Others use automatic billing to give to charity on a monthly basis.
“I give a contribution every month to St. Jude’s Children Hospital — put it on a credit card and pay it every month,” said Kathie Steinert, a retired teacher from Suffield, Connecticut. “I love it.”
Bieri agrees that automated billing can be a major convenience as long as the consumer knows how much he or she is spending. He recommends signing up with an online budget service, or an app on a smartphone that will collect each expense and force the consumer to face their expenditure to income ratio.
“Some of these apps actually give you a very scary income to expenditure type statistics over a year where you’re seeing how long you’re in the negative that you’re spending a lot more than you’re taking in,” he said.
And that’s when it’s time to examine how to live within a budget.
“I think it’s a double-edged sword,” Osher said. “If you forget about it coming out, it definitely kills your budget.”
Some New Apps Want to Help
However, the emerging issue of recurring automatic micro-payments has become so hard to track for consumers that new money-tracking apps are marketing themselves as the solution.
As part of its budgeting app, Clarity Money surfaces any recurring payments and says it can attempt to cancel some of them on your behalf. Ask Trim pitches itself as a virtual assistant that will also identify and negotiate recurring bills. Both apps require customers to connect their accounts. Another app Empower can help you see where all your money is going and help you trim unwanted bills.
Tips for Using Automatic Payments
The Consumer Financial Protection Bureau gives the following advice for using services with recurring automatic payments:
Keep a close eye on your accounts. Not only are you less likely to keep paying for a service you are no longer using, but you will see right away if a company takes out more than you have authorized.
Make sure you understand the terms of automatic bill authorization. Though many companies push for automated debit payments, you are not obligated to sign up.
Beware overdraft fees or charges for insufficient funds. Make sure to set your monthly payment date when you know you will have money in your account to cover it.
Be confident in the company you are trusting with your financial information. Handing over your bank or credit card information is a big deal. Make sure the company is legitimate and credible.