Auto-Funding of Fixed-Cost, Auto-Pay Bills

The last article, Paying Bills with Credit Cards, and Differentiating Between Automatic vs Manual Bills, introduced the following types of bills:

• Fixed-Cost Bills
• Variable-Cost Bills
• Occasional-Cost Bills

The article also discussed how the bills are paid:

• Automatically Paid Bill
• Manually Paid Bill

And, it mentioned how the payments for the bills are funded:

• Manually Funded Payment
• Automatically Funded Payment

This article is going to expand on the specific scenario of paying bills that are fixed-cost, automatically-funded, automatically-paid.  In other words, bill payments that can be fully automated.

Quick Summary of Additional Terminology from Previous Articles

The previous articles in this  Engineering a New Banking Model series have always assumed the wages should be deposited into the checking account.  Then, you would manually transfer the money into the unallocated vault.  The funds remain in the unallocated vault until you schedule bill payments, at which point you move the funds from the unallocated vault into the main savings account (i.e. unvaulted savings) from which the funds are removed when the bill is paid.

To be clear, this uses SoFi Bank terminology of "vaults" as a form of isolation buckets, where a specific vault can be created and named "Unallocated".  The "unvaulted savings" are what SoFi calls "Available Savings", which are the funds in the savings account that do not reside in a vault, and thus I call that money "unvaulted".

Full Automatic Payments

If the cost of a bill does not generally changed from month-to-month, it is a fixed-cost bill.  If the bill is automatically paid each month without having to manually schedule a payment, it is an automatically-paid bill.  If the funds from which to pay the bill automatically show up in the unvaulted savings, it is an automatically funded payment.  That specific combination if perfect for fully automating bill payment:

• Fixed-Cost
• Automatically Paid
• Automatically Funded

Multiple Direct Deposits

One possible way of achieving fully automated payments is to split the direct deposit of your wages across two different accounts, assuming your employer allows you to do so.  My employer, for example, allows each paycheck to be split across up to five different accents of my choice.  Additionally, the split can be asymmetric, meaning a different amount can be sent to each account.

If you can split your direct deposit of wages across multiple accounts, you can auto-fund the fixed-cost, auto-paid bills by automatically depositing the money directly into the savings account.  The remaining balance that is not used for fixed-cost, auto-paid bills should continue to go into the checking, as before.

Admittedly, since bills are generally due at the same time each month, this fully-automated payment technique is easier if you get paid twice a month instead of every two weeks.  If you get paid every two weeks, the day-of-month on which you receive direct deposits relative to when the bills are due changes from month-to-month.  But, if you get paid twice per month, then the direct deposits of the wages is the same from month-to-month relative to when the bills are due.

Seed Money in the Unvaulted Savings

Regardless of whether you get paid every two weeks or twice a month, you can add up your fixed-cost, auto-paid bills, divided the amount by two, and make that the amount per-paycheck that is deposited into the savings account.  And, either way, you might need some "seed money" to get the process started to ensure you have enough funds in the savings account at the time the fully-automated bills are paid.  The seed money is the amount of money you manually need to move from the unallocated vault into the unvaulted savings in order to get the fully automated payment process started.  

Calculating the amount of see money that is necessary is beyond the scope of this article, although I may choose to write in entire article on it in the future.  As a general rule, however, you should be safe if you are financially able to use an entire month's worth of fixed-cost, auto-paid bills as the seed money.  Although you will continue to earn interest since it is in the savings, it is probably more than is actually need to use as seed money.  Extra, unnecessary seed money is essentially taken out of circulation for other uses because it is no longer in a specific vault or unallocated vault.  Over time, perhaps you can transfer some of unused seed money back into the unallocated vault as you watch the daily balance on the unvaulted funds.

Paying Bills with Credit Cards, and Differentiating Between Automatic vs Manual Bills

If you read my last article entitle Isolation Buckets in the Payment from Savings Banking Model, then you might realize that this post is a different topic than the essential role of the checking account that I said I would cover next.  I will get back to that topic, but decided it was more important to cover paying bills with credit cards, and the difference between automatic and manual payments.

The diagram below is an extension of the diagram from that article mentioned above.  It splits the Bills into Manual Bills and Automatic Bills, and adds the Credit Card and Purchases bubble.  These are additions are the topic of this article. 

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If the concept of the Unallocated vault or Unvaulted money within the savings account is not familiar to you, you should go back and read Isolation Buckets in the Payment from Savings Banking Model.

What is a responsible credit card user?

Many people use credit cards, but not everybody should:

• If you do not understand how credit cards work, then you should not be using credit cards!
• If you do not pay your credit card statement balances in full each month, then you should not be using credit cards!
• If you routinely pay late fees and/or interest on credit cards, then you should not be using credit cards!
• If you are close to your maximum credit limit, then you should not be using credit cards!
• If you find yourself transferring debt around between different credit cards using balance transfer checks, then you should not be using credit cards!
• If you know you will not be able to control your spending on credit cards, then you should not be using credit cards!
• If you do not feel comfortable using credit cards, then you should not be using credit cards!

But, if you are a responsible credit card user, then you are probably already raking-in cash, travel points, store gift cards, etc., depending on which card or cards you use, without paying an extra dime to the bank(s) that issued your credit card(s).  For example, a SoFi Credit Card holder enrolled in SoFi Plus could be making 3% on all credit card purchase transactions.  If you are a responsible user that routinely makes money using credit cards, this article might provide you information about making even more money using credit cards by integrating them into the Payment from Savings Banking Model.  Regardless, you will probably find the concepts of fixed-cost, variable-cost and occasional-cost bills useful.

Bills that are Fixed-Cost vs Variable-Cost vs Occasional-Cost

Whether you use credit cards or not, you probably have some fixed-cost bills, such as

• Loans (mortgage, car loan, etc.)
• Certain kinds of utilities (cell phone, internet)

Those bills are fixed-cost because the amount of the bill does not generally change from month-to-month.  Although, even with such bills, the amount might still change occasionally.  For example, your mortgage company might re-evaluate you escrows once or twice a year, and decide you owe more or less than what you were paying because the escrowed amount has changed.  Similarly, if you Internet service is not locked-in, the cost of your Internet might go up over time.

You probably also have one or more variable-cost bills, such as

• Metered utilities (water, sewer, gas, electric, etc.)
• Credit cards

Those bills are variable-cost because the amount of the bill is almost always different.  Water and electric might go up in the summer because of water the lawn and running the air conditioner, but gas might go up in the winter because of a gas furnace.  The credit cards bills will vary often because of birthdays, Christmas, vacations, and unexpected situations such as car repairs and medical/dental expenses, as well as just big purchases for things you wanted or needed to buy.  If you pay for groceries on a credit card, you have undoubtedly noticed a large increase in the statement balance each month over the past few years.

There are also bills that occur at a frequency that is less than once-per-month, and these are the occasional-cost bills:

• License plates are due once per year
• Car insurance (if you choose to pay every 6 months to take advantage of a discount)
• Life insurance (perhaps you have to pay the premium quarterly

Automatic Bill Pay vs Manual Bill Pay

Some -- if not most -- of your monthly bills can probably be setup for automatic payment.  It can be a push payment, such as when you use your bank's bill payment feature to send a payment.  Or, it can be a pull payment, such as when you schedule a payment on your credit card or utility company website to request money from your bank.  Either way, the question is should you do automatic payments?

Whether the payment should be automatic or not depends on several factors:

• Is the bill fixed-cost, variable-cost, or occasional-cost?
• Will you be paying the bill with a credit card, or bank ACH?

One of the assumptions from the Payment from Savings Banking Model is that you will not be paying much, if any, bills out of your checking account because the interest is so low.  Paying bills with cash, checks or debit cards is more attuned to the old-school Traditional Banking Model.

If you are a responsible credit card user using the Payment from Savings Banking Model, the ideal situation would be to pay all bills automatically from the credit card, except for one bill per month which is a manual payment of the most recent credit card statement balance itself.  However, that is rarely possible or practical.  For example, you cannot generally use credit to pay installment credit, which means you will not be able to pay mortgage or car loan payments via credit card.  Additionally, sometime there is a financial disadvantage involved with paying by credit card.  My mobile phone company, for example, gives a $20 discount ($5/line/month) if I do automatic-pay using bank ACH; if I do not do automatic payment, or if I do automatic payment via debit or credit card, I do not get the $20 discount.

General Rules of Thumb

I have developed several general rules of thumb that help determine how specific bills should be paid.  These work for me, and you should evaluate if they work for you.

1. If you are a responsible credit card user and the bill allows automatic payments from credit card, and does not charge significantly more for paying the bill with a credit card, then setup automatic payment using a credit card.
2. If the bill is fixed-cost and is not automatically charged to the credit card in point 1 above, then setup automatic payment using bank ACH from the savings account, if possible.
3. As a last resort, use manual payment bank ACH from the savings account if you the bill is not automatically paid because of points 1 or 2.

These points are discussed in the sections below.

Automatic Bill Payment Using Credit Card

Automatically paying bills using a credit card is ideal.  You will earn rebate/rewards points, per the terms of your credit card, for all of the bills you pay with the credit.  For example, with the SoFi Credit Card, if enrolled in the free SoFi Plus program, you could be earning 3% back on purchases for up to a year if you join SoFi Plus.  Additionally, for any credit card, you will have 20-40 days of extra interest from the day the bill is paid using the credit card until the day you pay the credit card statement balance off using manual bank ACH.

There are other benefits, too.  The credit card aggregates all of the bills together, so you just need to make sure the credit card itself gets the statement balance paid in full each month to ensure that you do not pay any late fees or interest. The monthly bills charged to the credit card can occur on any day, even weekends and holidays, so no bill paid with credit card should ever be late.  Additionally, the credit card acts as a buffer -- since the statement will be available at least 20 days before the due date, you have a few weeks to figure out what to do if the bill is unusually high for some reason.

It should be noted that your first payment from you savings account to pay off your credit card statement balance might take a few extra days.  This is because the credit card company will likely force you to validate the savings account before you can make a payment from that savings account.  This validation typically involves the credit card making two different low-value deposits into the savings account, and then having to enter those specific values back into the credit card web site as validation that you have access to that account.

Even though payment of bills to the credit card is probably an automatic payment, paying the credit card statement balance the following month will be a manual payment using bank ACH from the savings account.

Automatic Bill Payment Using Bank ACH from the Savings Account

If the bill allows for automatic payment but you choose not to or cannot charge it to a credit card, the automatic billing with bank ACH is a good option.  Note, however, that automatic payment of a variable-cost or occasional-cost bill via bank ACH is somewhat risky, as there is an increased chance that you might not have enough unvaulted funds within the savings account.  Therefore, I personally use the automatic payment using bank ACH option for fixed-cost bills only.

Manual Bill Payment Using Bank ACH from the Savings Account

You probably have certain bills that you must schedule manually each month.  Honestly, if you are doing things right, most of  these will actually be payments of credit card statement balances.  You still make interest up to the day the money is withdrawn, but have to schedule the payment each month.  For credit cards, you would typically schedule the payments via the credit cards web site; that will ensure that the funds are not late, and get credited to the correct credit card account (some credit card banks let you manage multiple credit cards from the same online account).

Automatic vs Manual Funding

The sections above talk about automatic or manual bill payment.  But it is just as important to consider automatic vs manual funding.  The automatic or manual bill payment refers to whether you have a recurring scheduled payment, or have manually initiate the payment each month.  The automatic vs manual funding refers to whether the money will automatically be available in the unvaulted savings when the payment is due, or whether you have to manually move money from the unallocated vault (or elsewhere) to the unvaulted savings before the payment occurs, regardless of whether it is schedule for automatic or manual payment.

• If you are charging bills to a credit card, you probably want manual bill payment, manual funding for that credit card statement balance.
• For those bills that are automatically paid via Bank ACH, you can choose whether you want automatic or manual funding.
• For those bills that are manual paid via Bank ACH, you probably want manual funding.

The manual funding is somewhat trivial.  Basically, you have to track when the money is needed in the unvaulted savings account, and transfer money into that account from the unallocated account before the payment will be removed.  The transfer only takes seconds, and it does not matter whether you do it early or wait to the last day, especially if you are making the same interest on both unvaulted funds and the unallocated vault.

The automatic funding is a bit trickier.  Basically, you might need to setup you direct deposit to split your paycheck, or possibly setup day-of-month recurring transfers.  For automatic funding, you need to plan automatic steps to ensure the amount to cover the automatic bill payment is in the unvaulted savings on time.

Additional Considerations When Paying Bills from Credit Cards

There are several other things to consider when paying bills with credit cards, and they are summarized below.

Consider Paying Bills with a Dedicated Credit Card

If you are going to regularly pay bills with your credit card, you might consider using a dedicated card.  In this case, there is nothing special about the card itself -- it can be an old credit card, but preferably one that earns some good rewards or points.  But, you might want to use that card only for bill payments, and use a different card for purchases.

Using a dedicated credit card for bills just make sense.  This is because it provides an easy way to check if it is working.  Every month when you log in to get the statement balance, you can take a quick look at the transactions and see that all of the bills are actually be charged to the credit card.  Additionally, if your purchases are a bit high for some month, you can be assured that the dedicated bill pay credit card has the statement balance paid in full, even if you enter the unfortunate scenario of not being able to fully pay the credit card you use for purchases.

Consider Using a Non-Working Spouse's Credit Card for Bills

If you have a non-working spouse (i.e. a wife that is a stay-at-home mom, etc.) and that spouse already has a credit card, your might want to charge all of the monthly bills to that credit card.  This is especially true if the non-working spouse is on the card but the working spouse is not.  The major benefit of doing this is to maintain excellent credit history for the non-working spouse in the event that something happens to the working spouse.

Isolation Buckets in the Payment from Savings Banking Model

In order to make the Payment from Savings Banking Model work smoothly, there needs to be some amount of isolation of money within the savings account.  Imagine, for example, if all of the savings money was lumped into one big heap within the same savings account.  It would become very difficult to know:

• How much money has already been allocated to pay pending bills
• How much money has been saved for rainy days, major purchases or general savings
• How much money has been set aside for each child's future
• How much money is still available to use for "whatever" because it has not yet been allocated for some other use

Separate Savings Accounts

One solution would be to isolated money into different savings account.  That solution would work, but does not seem practical.  Managing a large number of accounts would be cumbersome for several reasons.  For starters, the savings accounts would likely be spread across multiple banks, and it could take several days to move money between accounts should that become necessary.

Separate Virtual Accounts within One Savings Account

A better solution is to have one savings account that allows money to be isolated into separate savings buckets, while continuing to earn HYSA rates for all savings buckets, and allowing easy transfer between savings buckets, and perhaps even easy transfer back and forth between savings buckets and a paired checking account.

Luckily, some of the banks have started providing technology for using isolation buckets.  The banks typically refer to these as savings vaults, savings goals, virtual accounts (not be confused with virtual credit card numbers), etc..  The banks that provided these features tend to be the "mobile first" oriented banks that work on ease of use from mobile apps before they put the same features into a more traditional web sites.

SoFi HYSA is an Ideal Choice

The SoFi High Yield Savings Account does well at providing all of the desired features.  SoFi calls the isolation buckets "Vaults".  The only difference between the SoFi HYSA and the diagram above is that the bills should probably not be isolated into a vault, but should instead just be the money in the savings account that is not placed into a specific vault, as is indicated by the dotted line below.

With all things being equal, it would make sense to have the unallocated money unvaulted (just floating in the savings account, not isolated into a vault), and put the money for pending bills into a vault.  But, all things are not equal.  Bank ACH transfers to and from the SoFi HYSA will go to and from the unvaulted money.  It is not possible to do bank ACH transfer directly into or out from a vault.  Therefore, since the Payment from Savings Banking Model relies on being able to pay bills directly from the savings account, it makes sense to keep the money for pending bills inside the savings account but outside of a specific vault.  

It should be noted that leaving the bill money unvaulted and making the unallocated money vaulted is not a hinderance, but rather just a practical usage pattern.  The SoFi app and website let you transfer money between checking account, unvaulted savings account, and savings vaults for free, without count or dollar limits, and within seconds.

Revised Payment from Savings Banking Model

Given the discussion above, the diagram of the Payment from Savings Banking Model is now changed as is shown below. 

My next article will go back to the top of that diagram and discuss why the paired checking account still has an essential role in the Payment from Savings Banking Model.

Introduction to the Payment from Savings Banking Model

This page introduces the new Payment from Savings Banking Model, which is designed to maximize the amount of money you "make" while paying bills.  Future articles will expand on this new Payment from Savings Banking Model.

Why Is the New Model Viable Now

There used to be US government regulations restricting the number of withdraws you could make from  a "savings deposit" bank account each month or statement period.  But, those restrictions have been removed by the government because of Covid-19.  If you are not familiar with the Traditional Banking Model, or how Covid-19 broke that model because of changes to Regulation D, then you may want to read the following two previously published articles. 

• Traditional Banking Model - Checking & Savings
  
• Covid-19 Breaks the Traditional Banking Model
  

Given the Regulation D wording prior to Covid-19, the Payment from Savings Banking Model was not typically viable;  most households need to pay more than six bills per month.  However, with the Regulation D transfer limits removed, the Payment from Savings Model has become viable.

Simplest Form of the Payment from Savings Banking Model

In it's most simple form, the new Payment from Savings Banking Model moves the bill payments from the checking account to the savings account.

The diagram below shows paying bills out of the checking account.  In this model, the money in the checking account is used to pay bills.  But, that is not the best banking model because the money in the checking account makes little or no interest.

The diagram below shows paying bills of the savings account.  In this model, the money in the savings account is used to pay bills, and that money earns interest until the money is removed from the savings account.  But, you have to make sure to transfer enough money from the checking account into the savings account to cover the bills.

Alternately, you could deposit the wages directly into the savings account, and transfer everyday spending money from the savings account into the checking account.  However, for reasons I will explain in a future article, depositing the wages into the checking account (diagram above) is preferred over depositing the wages into the savings account (image below).

Making It Work -- Choosing the "Right" Bank

The Payment from Savings Banking Model relies on several factors, including choosing the correct bank. In my opinion, SoFi is an ideal choice of bank to use for the Payment from Savings Banking Model because it supports many of the key features that are needed to make the Payment from Savings Banking Model work smoothly.  These features are discussed below.

High Yield Savings Account

Typical bank account offerings pair a checking account with a savings account.  But, what you really need is to pair a checking account with a high yield savings account, or HYSA.  A high yield savings account typically offers an interest rate many times higher that a regular savings account.  For example, at the time of writing this article, traditional savings accounts paired with checking accounts at banks and credit unions were paying about 0.01-0.03%. But, on the same day, the SoFi High Yield Savings account that gets paired with their checking account offering was paying 4.6%.  

If you choose to pay bills from a bank account that is not an HYSA, there is really no point in using the Payment from Savings Banking Model because the earned interest will not be enough for the effort.

Little or No Withdraw Restrictions

There are many banks that offer HYSAs.  They are generally offered as independent accounts instead of being paired with a checking account.  More importantly, however, are the withdraw limits!  Remember that the changes to Schedule D say that a bank can choose to loosen the restrictions if they want to, but does not require the bank to do so.  Many HYSAs have withdraw restrictions similar to the items mentioned below:

• Hold Times -- Money deposited into the HYSA cannot be withdrawn for a certain number of business days
• Maximum Withdraw Transactions per Month -- You cannot withdraw money more than a certain number of times per month; each bill pay counts as a withdrawal
• Maximum Withdraw Value per Month without Written Notice -- You cannot withdraw more than a certain dollar value of money per month without providing written notice of your intent to do so

It should be obvious that any HYSA restrictions similar to the bullet points above would make it utterly impractical to use that HYSA for bill payment.

Isolation of Bill Money and Other Money into Separate Buckets

If you are going to use the Payment from Savings Banking Banking Model effectively, you will want to isolate your bill payment money from the rest of the money.  The Traditional Banking Model does not necessarily do that isolation, as the traditional model generally provides only two buckets in which to hold your money: checking money, and savings money.  But, that does not work so well with the Payment from Savings Banking Model, because really the bill payment money should be isolated from the savings money, and you want both to earn as much interest as possible.

The reality is, however, that you will likely also want to isolate your money into many separate buckets intended for many different purposes, while continuing to earn interest on the money in each bucket.  Importantly, you will want to use a bank that makes it quick and easy to transfer money between the isolation buckets, as well as with external accounts you may have at other banks.

Fast Direct Deposits and Transfers with External Banks

The faster your pay checks and direct deposits are deposited into your account, the sooner you start earning interest.  Likewise for money transferred between banks.  Therefore, you want a bank that does such Bank ACH transfers fast.  Bank ACH transfers take one to three business days.  Many banks will hold onto the money for an extra day or two -- pushing all bank ACH transactions out to three days -- so that they can profit from that money for an extra day or two.  From what I have experienced, SoFi Bank consistently has some of the fastest bank ACH transfers.  Direct deposits are not only consistently two days early, but also typically arrive several hours before other banks that offer 2-day early pay.

Why SoFi?

As you can see from the conversation above, choosing the correct bank with the correct accounts is very important.  The SoFi Bank offering is ideal because of many reasons:

• Checking account gets paired with HYSA
• HYSA has good interest rates
• HYSA has no old-school hold/max withdraw restrictions
• HYSA provides good isolation of money into separate buckets
• SoFi consistently has some of the fastest direct deposits
• SoFi consistently has some of the fastest external transfers, both inbound and outbound

Isolation of money into separate buckets will be the topic of my next article.