Whether you use direct debits or standing orders, financial automation can seem like a good way to track your finances but it could be leaving you worse off.
The digital age and the improvements to internet banking have helped to automate our financial lives, with more and more of us turning away from cash as the preferred form of payment. Payments by direct debits hit a new record last year according to Bacs, with 71% of household bills now being paid in this way.
But while bills and rent have long been covered by standing orders, it is interesting to see the increase in direct debit payment of smaller items, particularly things we’d have classed as entertainment are now increasingly being paid for through an automated process.
Research from the U.S. based Media Insight Project found that 54% of millennials now subscribe to movie or TV download services, and just under 50% pay for music services and video game subscriptions. Other leisure services paid for in this way include apps and gym membership.
Monitor your money better
On the face of it, this could be a useful way of staying on top of your finances. In the past, you may have set a budget for DVD rental for instance, which might go out of the window once faced with a multitude of titles as well as the snacks available at the counter! But more likely than not, this side of finances would be completely unaccounted for – except in a panicked, retrospective way towards the end of the month – and would hence burn a proverbial hole in your pockets.
The advantage the new breed of ‘serial subscribers’ is that you know exactly how much you are going to be paying out per month, giving you an easy route into budgeting and a better chance of staying in control of non-essential spending.
But whilst it might be a simple way of managing your finances and cutting down on unnecessary spending, how beneficial is this growing trend? Are there pitfalls of automation that outweigh the benefits? Or is it simply a case of needing to adapt to where society is going?
Financial automation – are you spending more?
‘Add-ons’ seem to be the way forward in today’s digital society. From your add ‘£1 for extra bacon and cheese’ at trendy burger joints, to additional levels and features on apps, it seems everyone is trying to get that little bit of extra money out of us these days.
Even Netflix is at it: despite fixed tariffs, it offers viewers the chance to add extra users for a higher price, in recognition of the fact that many people will share log in details anyway these days.
And one suspects this stealth by loyalty will continue. It seems only a matter of time before additional programmes are available on streaming channels at an extra cost and perhaps even standard premium classes on trains, which might offer some but, not all of the perks of first class, such as a free coffee or newspaper, or even additional seating areas for these ticket holders only.
So far, so good you might think. After all, we like the service and added benefits help to keep us sweet.
Throwing money away
However, the concern is that we risk throwing away good money. Every time we super-size for an extra £1.50 (or whatever the current deal of the day is), we are essentially handing control back to these companies. A few pounds here and there may not make too much difference but, as we know only too well, it all adds up.
Every time we set up a standing order with a company, we make a new financial commitment, which at times can lock you in for a number of months or even years – we have famously and controversially seen this with mobile phone contracts.
This is fine if we are using the service regularly, but what if we’re not?
We’ve all got stories of cinema passes, loyalty schemes and gym memberships that we never use. In fact, in my own case, not only did I not use my cinema pass for months on end, but I also made the problem worse by going to other cinemas where the card wasn’t accepted, then paying the same as everyone else. It would have been much cheaper to just pay for each individual cinema ticket, particularly in the long term!
Inertia will waste you money
Inertia can after all be a terrible drain on your finances. If you are going to set up standing orders in this way, you have to be absolutely sure that you are going to make good use of the service. Otherwise, you run the risk of simply wasting your money.
Sophie Robson is the author of several reports on Young People and Finance, notably ‘Generation Y: the (modern) world of personal finance”, which was published by the Centre for the Study of Financial Innovation in 2012 and writes and speaks regularly on the topic.
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