Q&A: Manual or Automatic Payment?

Dear Liz: Since I lost my second job, we have fallen behind on our bills. Although we get paid on Friday, by Monday our checking account is in the red even without buying anything.

It's all going to automatic payments for things like insurance and college savings for our child. I think the bank has a way of processing transactions to maximize our bounce fees. Should we take control and pay manually? Is automatic payment a recipe for disaster?

Answer: In your situation, yes, because you're spending more than you make. The bank's fee-maximizing policies aren't helping matters, but the fundamental problem is that you're living beyond your means.

Your first step should be to use a refund calculator to see whether you can lower your tax withholding and take home more in your paychecks. Turbotax has one on its site called TaxCaster that's easy to use. If you're on track to get a fat refund next year, adjust your withholding so you can get the money now, when you need it. The human resources departments at your jobs can help with this.

Once you have a clear idea of your current income, review your spending to see where you can cut. Those college contributions should be among the first to go. Yes, you want to educate your child, but other expenses—including current bills and retirement savings—must take priority until your income is higher. Slashing expenses may be painful, but it's necessary to avoid going into debt or incurring unnecessary bank fees.

You can call the bank and ask it to turn off bounce protection on your debit card transactions, but you may not be able to do so for automatic payments or checks. If that's the case, you may want to discontinue automatic payments until you get a better handle on your finances.

Another option, if you want to continue with automatic payments, is to sign up for true overdraft protection. This is less expensive than bounce protection and taps your savings or a line of credit if an automated expense exceeds your balance.

Automatic payments are a great way to make sure your bills are paid and that you don't incur late fees. Automatic payments also can protect your credit, since skipped payments on credit cards and loans can devastate your scores.

But you have to be able to keep a pad of cash in your checking account or have low-cost overdraft protection. If you can't, automatic payments can cause more problems than they solve.

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