In general the idea of setting up auto pay for making payments to vendors that are paid each month, like credit cards, rent, utilities or car payments is a good idea. It gets you out of the time consuming job of physically making the payment either by check, through Venmo, PayPal or whatever other digital payments platform you’re using.  It also gets you out of the late fees that might hit because forgetfulness.

I do, however, set limits in terms of how I allow these auto payments to happen. The biggest  limit I put on allowing auto payments:  I only allow those that are fixed payments to happen without my approval.  There are circumstances where variable payments will come, like your utilities or credit cards, and I like the ability to accept or reject those payments.

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The best example of people getting screwed by auto-payments is the Texas couple that was reported to have $16,000 pulled from their savings account for a single month of electricity during the 2021 winter weather anomaly. That must have happened because the utility was given automatic withdrawal access to this couple’s savings account.

Here’s how I use the banking system to restrict these kinds of transactions.

  1. Set Up Separate ACH Account
  2. Set Up ACH Account At Separate Institution
  3. Disable Automatic Overdraft Protection
  4. Sweep Cash Into ACH Account Each Month
  5. Review Variable Bill When A Statement Is Available

Set Up Separate ACH Account

I use and recommend a separate account that is dedicated solely for ACH (automatic withdrawal) transactions. I look for accounts that can be managed for free.  I use banks that offer accounts but have no monthly cost and allow low threshold balances. I want to keep no more than $50 to $150 in this account as a float to keep the account open.  In other words, when a transaction pulls money out of my account, the balance does not go below $50 – $150 each day of the month.

What this does is limit transactions from processing through the ACH account that exceed my threshold plus the money I put in to cover the monthly charges (more on how to do that later). For example, if a utility uncharacteristically wants to hit me with a $2,000 or even $500 withdrawal, it will not clear because the available cash (float plus typical bill amount) in the account is lower than the amount that utility is trying to withdraw.

To be clear bouncing ACH transactions that are not approved is our backup and not or intention. It’s how we protect ourselves from vendors withdrawing more cash than you approve.  Approval is not guaranteed just because a vendor submits a bill for what they want.  The statute (is almost every state) requires that you approve the invoice presented.

Set Up ACH Account At Separate Institution

Wherever you set up your ACH account you want to make sure it’s not at the same institution where any of your savings, IRA, 401k (retirement in general) or education savings – any account where there’s a pile of your money.   The purpose for separating the institutions is to make sure that the institution’s standard terms and conditions don’t allow them to steal money to from another account to cover an ACH transaction that exceeds the float amount that you set.

Understand, that when you get that thick brochure, with pages of eight-point type (that you NEVER read), from the bank when you set up an account – those rules are not there to benefit you, they’re there to fuck you. The fine print in those documents says, among other things, that if one account goes negative they can pull from any other account in the institution to satisfy the debt that you’ve accumulated in the account with the overdraft. There are some regulatory restrictions regarding these kinds of bank rules however, we want to make sure we make OUR rules for withdrawal are bulletproof by keeping our savings in a completely separate institution that cannot get to our cash without litigation.

Disable Automatic Overdraft Protection

When you set up your ACH account at a separate financial institution make sure you disable automatic overdraft protection. Almost every bank has it, in fact, it might be a regulatory requirement in your state. By disabling automatic overdraft protection you’re saying to the bank and to the interchange that you will not allow transactions to hit your ACH account unless there’s enough money in the account (at the moment the transaction is testing) to cover the transaction being presented. If you do not disable automatic overdraft protection the bank will allow these transactions to hit and you will be, according to almost all terms and conditions (remember the thick brochure that you didn’t read), liable for the difference between what was submitted and the cash that you’re short for the transaction.

This is the best way we can protect ourselves from transactions that we don’t authorize from hitting our account. Some banks might call it something different than automatic overdraft protection but the general idea is that we do not want to allow transactions to hit our account unless there is enough funds in the account to cover those transactions. This is very important and that brochure you were handed when you open the account says you are contractually liable for the difference between your balance and the transaction amount that hit your account. So, for example, if you have $100 in the account, and a transaction hits for $1,000, and you haven’t disabled automatic overdraft protection you are liable for $900 –  the difference between the balance and the charge.

Sweep Cash Into ACH Account Each Month

As monthly transactions begin to set up for withdrawal, I will transfer cash from the institution that is holding my savings into the institution where my ACH account is setup. I do that using bank transfers that are free from one institution to the other and not by wire unless it’s an emergency.  Remember, my goal here is to keep the ACH Account threshold low so that only the transactions that I want to clear my account are allowed to clear by the interchange.

The interchange is the banking system that processes ACH transactions in the background by submitting a charge, testing the account that it’s supposed to hit, for a balance big enough to cover the charge and then sending a signal back to the charging bank that that account and balance are valid.   If the account or the balance in the account are not valid the ACH charge will be denied. This is the process that happens when you hand a vendor your credit card at point of sale to make sure that your credit card has a valid balance to cover the charge that they’re about to put on that card.

By sweeping cash, from our savings and into the ACH account,  we are in control of what is allowed to hit and what is not allowed. You can do this once a month by estimating your monthly charges or you could do it three or four or five times a month, depending on how many charges you have hitting your ACH account. In some cases I will transfer money from my savings into my ACH account a couple of days before I know when each charge is going to hit.  This allows for the balance to grow and shrink as my deposits hit and money is withdrawn.  It prevents fraud or erroneous large transactions from hitting my ACH account and being approved without my knowing.

The bottom line here –  WE DO NOT WANT TO ALLOW LARGE TRANSACTIONS TO HIT  WITHOUT US HAVING CONTROL.

Review Variable Bills When Statement Is Available

For the charges that change every month, like your credit card or your utility bills, get the statement online or in paper and review the charges and make sure they’re legit. These are the kinds of transactions where I sweep cash into my ACH account two days before the payments are set to hit. This way if there is a fraudulent charge on a credit card, you’ve caught the charge before cash gets pulled from your account.  It gives you the ability to dispute a charge with the credit card in advance of the funds being pulled from your account.

Another measure I use to make sure that fraudulent charges don’t hit my credit cards and gives me the chance to dispute charges when they do, is to use American Express. I don’t represent American Express, I don’t collect any commission income from them and I’m not affiliated in any way with the institution. I have, however, been a user of their products since 1988 and every time I’ve had a dispute, American Express solves it almost immediately or credits my card within 30 days. Visa and MasterCard both have terms and conditions that seem to be designed to make a disputing charge more difficult than American Express. Their systems don’t feel like they’re designed for the customer – they seem to be designed for the vendor (the merchant) and if you don’t get to them within their specified period of time, that could be in 10 days, it could be 30 days, it could be 90 days (each bank is different) than those cards will fuck you. And in my experience Visa, MasterCard and the banks that use those Networks, are not as customer-focused as American Express. Which is why I recommend an American Express card. It has an additional annual fee associated with using the card, but the customer service and the ability to dispute charges getting credited quickly is far superior. I still keep a Visa or Mastercard in my pocket because some vendors won’t take American Express, but I don’t use it unless the store does not take American Express.

So there you go, don’t allow yourself to get hosed like the poor couple in Texas who had a $16,000 utility bill taken from their life savings because a greedy fucking utility company was out screwing their customers at a time of need and at a time when millions of people were being devastated buy a crazy weather event.

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