Being able to quickly, safely, conveniently, and accurately pay bills from home (or anywhere else you can access the Internet) is probably the single biggest advantage of having access to your bank account online.  And as far as that goes, I’m NOT a fan of “automatic draft,” but I AM a fan of “paying bills online,” or “online bill pay.”  I will now explain the difference between these two payment methods.

Automatic draft

With automatic draft you authorize a company to electronically withdraw money you owe them directly from your account.  Companies tout automatic draft as a consumer benefit because it’s convenient (you don’t have to write a check or take any other action) and cost-effective (you don’t have to pay for postage or worry about late fees).  While it’s true that automatic draft is both convenient and cost-effective, bear in mind that it’s the companies you deal with that control the amount and timing of the electronic transfer (which is why they love it so much).

So why am I not such a fan of automatic draft?  Note that it’s fine if everything goes exactly the way that it should – meaning that you’re charged correctly at the right time.  After all, if you owe someone $100 on the 1^st of the month it’s actually nice if that happens without you having to think about it.  No, if you’ve got automatic draft and you get poor service and/or you’re incorrectly charged then suddenly you’ve got a different problem: the company already has your money, thus leaving you the burden of getting it back (which puts you at a disadvantage – you always want to be the one holding the money in a financial dispute if at all possible).

Be Careful of Auto Billpay

As an example, my  friend Alison once joined a health club that required payment through automatic draft as a condition of membership.  We agreed and everything went fine…until she decided to terminate her membership.  I remember balancing the bank statement sometime afterwards and seeing a charge from the gym.  Somewhat irritated I thought, “Surely that’s the last charge.  Didn’t Alison terminate her membership over a month ago?”  But the next month’s bank statement came and a monthly charge was still coming through!  We then realized this was never going to stop unless we took action.  It took several calls to the heath and their accounting office to get things straightened out, and we finally did get our money back, but it took a good deal of effort our part to make that happen.

So to summarize, one of the main drawbacks of automatic draft is that if there’s a problem then you have to make all of the effort to fix the company’s mistakes in order to get your money back.  I don’t like that.  I would recommending using your credit card.  Still, I’m not saying you should never consider using automatic draft.  For example, in some cases when paying back a loan you’ll be offered one interest rate, but if you agree to pay it back using automatic draft then you’ll be given a lower rate.  So the bottom line is that if a company you’re dealing with is willing to share some of the benefits they receive from getting paid by automatic draft then I believe it’s worth considering.  If they’re not – if all they want is an automatic way to take your money at the time of their choosing – then I think you should select the method of payment that’s best for you, and most often that will be to pay your bills online using your bank account (which is sometimes referred to as “online bill pay”).

Paying bills online (or online bill pay)

Like automatic draft, paying bills online using your bank’s website is convenient and cost effective.  In addition, it enables you to control how much money you pay, who you pay it to, and when they’ll be paid.  This is how it works.

1. Log on to your bank account (for general information on how to do this if you don’t already have access to your bank account online click here).
2. Go to the “Pay Bills Online” section (the name will vary by website).
3. Enter who you want to pay (if the payee is not already in your bank’s records then you may have to input the information manually the first time you make a payment).
4. Decide which account you want the money to come from (it could be from a checking or a savings account you have at the bank).
5. Enter how much you want to pay them.
6. Enter the date you want them to be paid.

After you’ve input this information then one of the following two things will happen.

1. If the payee is set up for electronic payments at your bank then the money will be transferred from your account to the payee’s account on the date you selected.
2. If your payee is not set up for electronic payments then on the date you selected your bank will automatically print a check and mail it to the payee.

Note that paying bills online is slightly more work than automatic draft because you do have to take some action: you have to log onto your account and follow the steps above.  However, it still saves you postage and the time it takes to write checks (just like automatic draft).  But even more than that, paying your bills online enables you to take control of your hard earned money by determining how much you will pay, whoyou pay it to and when they’ll be paid.

By managing your banking needs online to the extent possible you can cut down on the number of inconvenient, time-consuming trips that you would otherwise have to make to the bank.  Following are some specific and useful things relating to your bank accounts that you can do online.

#1 – Check account balances

You can check the current balance of your checking and savings accounts online.  This is useful because it enables you to see whether certain charges (such as a recent purchase) have hit your account and whether or not the amounts are accurate.  It also enables you to see whether checks you’ve deposited have cleared.

In addition, if you have a credit card issued by the bank, you can also review your credit card activity online.[1]   Again, this is very useful because it enables you to verify if your credit card transactions have processed and whether or not they’re accurate.  It also gives you the ability to monitor your account as often as you like to ensure that no unauthorized charges have been made.

#2 – View check images

By accessing your account online you can view (and print) images of checks you’ve written.  This comes in very handy if you lose a check carbon and you can’t remember who the check was to or how much it was for.  To give you an example of something I’ve done many times, say that you’re organizing the check carbons for checks your recently written as part of updating your checking account balance.  You’ve got check carbons for checks 1001 through 1010, but the carbon for check 1008 is missing.  So what does that mean?  Did you void check 1008 or did you actually write it?  You can solve the mystery by accessing your account online and looking up check 1008.  If it hasn’t cleared after a period of time you most likely voided it, but if it did then you should be able to see it online, even to the point of being able to print out a copy for your records if necessary!

#3 – Pay bills online

The ability to pay your bills electronically is a HUGE benefit of doing your banking online.

#4 – Transfer money electronically

Another convenient feature of online banking is the ability to transfer money electronically between your financial accounts.  For example, you can transfer money between:

• A checking account and a savings account at the same bank.
• A checking account and a savings account at a different bank.[2]
• A checking (or savings) account and an investment account with another financial institution (which gives you a convenient way both to invest and to draw funds from your investments as needed).

Transferring money from one account to another at the same bank or financial institution is generally very straightforward.  However, to link accounts at two different banks or financial institutions takes a little more work.  To do so, log onto your bank or financial institution’s website, go to the “Electronic Funds Transfer” section, (the name will vary by website) and follow the applicable instructions.[3]  Is the process of figuring out how to transfer money between your financial accounts a bit of a pain?  Sure, but you’ll reap the rewards of your time and effort for doing so many times over.  Here are some examples of how.

• Each time you get paid you can transfer money to your savings account.  It can either be a fixed amount each paycheck, or you can vary it based on your goals and the amount of extra money that you have.  Likewise, if your checking account is getting low then you can bolster it by transferring money to it from your savings account.
• If you’re in your working years, you can set up your primary checking account to safely, conveniently and consistently transfer money to your investment account to save for retirement or other long-term goals.
• If you’re retired, you can transfer a set amount each month from your investment account to your checking account as a living allowance.  In addition, you can transfer additional money to your checking account for whatever purpose at any time (assuming you’ve saved and have the additional funds!).

Again, prior to online banking, doing any of the above transfers was a real pain.  It required you to go in person to your bank or financial institution or to do everything by mail.  But with the ability to do these kinds of transfers online, you can move your money to where it needs to be in a manner that’s quick, safe, time-efficient and easy to track.

#5 – Stop payment on a check

If necessary for whatever reason, you can put a “stop payment” on a check in order to void it before it’s deposited or cashed.  You used to have to make a trip to the bank in person to stop payment on a check, losing valuable time in the process (because for a stop payment to work it has to be done BEFORE a check clears!).  However, you now have the ability to stop payment on a check through online banking.

#6 – Communicate with your bank

Getting answers to short, specific questions used to require a time-consuming trip to the bank to talk to a service representative or to navigate through an impersonal (and often overly-complicated and unhelpful) phone menu.  Now many banks provide you with the ability to get answers to specific questions online from a service representative via email.  If you’re not able to successfully get answers in this way then, of course, you always have the option to go to your bank in person or call their customer service line.  But if you’re able to resolve your questions online then that’s so much more convenient!

Invest the time to learn how to access and effectively use your bank accounts online

Online banking is really about investing.  How is that?  Remember, effective investing means making a sacrifice now in order to reap far greater benefits in the future.  In this case, if you take the time to learn how to access and effectively use the online features of your bank accounts (which not only include the items above, but even more) then you will reap great dividends in the future in terms of saving time, stress and money (no more stamps for bills, for example!).

So, if you don’t already have an online account with your bank or financial institution, follow the instructions on their home page to set one up.  If you have any trouble doing so then find their phone number in the “Contact Information” section of their website and talk with someone with their technical services group.  If that doesn’t work then, in order to obtain all of the benefits of online account access, it’s well worth the effort to make a trip to the bank in person to get help directly from a service representative.