Many personal finance bloggers encourage readers to set up automatic monthly payments. This results in fewer missed payments, fees, and maybe most important, it ensures that we’re making progress on our debt payments. If we commit to paying extra on our student loans, an automatic payment is great because it happens without us being actively involved, so we are less likely to miss that money.
This year, we’ve been doing the exact opposite. Since January, we’ve made student loan payments of $7,000, $16,000, and $10,000. We’ve also contributed 4 payments of $5,000 to our Roth IRAs and my individual 401(k) accounts. That’s a lot of lump sum payments!
Our monthly bills like rent utilities are automated, but our retirement and debt repayments are not.
Why We Make Lump Sum Payments
I’ve gone through a ton of life events over the past year, which has made automating our bills seem like a bad idea: I am paid a salary but most of my compensation from work comes from commission, so scheduling payments monthly doesn’t make much sense.
I also am running a small business with blogging and other online ventures, so projecting my income is even more difficult. The amount I’m allowed to contribute depends on how much I make, so every time I hit a big milestone in income, I contribute more to our retirement accounts.
Why do we let our checking and saving accounts get so big before making payments? Part of it has been because we’ve been lazy, but a big part of it is because parting with our money is difficult. We worked hard for it and now we have to give it away?
Readers, do you make monthly payments towards your debt and retirement accounts or do you wait and make large payments?
I make monthly payments into my Roth IRA account and a yearly lump payment into my SEP IRA.
I’ve got no debt and no tax benefit retirement accounts, so I can’t comment on those. But I my contributions to trading/business capital are lump sum rather than monthly. About four times a year I look how much has accumulated in savings and make the appropriate moves.
We do a combo attack. I pay a little extra principal automatically each month and then also hit it with lump sum attacks when we know we have the extra cash. It seems to work out nicely and keeps us on track for early payoffs even when we can’t make extra money payments.
Daniel,
I tend to make large payments once I’ve saved that money or realized my expenses for a month weren’t as high as usual. At the same time, if I know something will tempt me later in the month, I’ll put that money away immediately so I don’t spoil it.
-Christian L. @ Smart Military Money
The only time I make lump sum payments is when I receive lump sums: tax returns, unclaimed money, or an unusually large commission.
Our income is completely regular so we make monthly contributions to our retirement accounts. When my student loans come out of deferment we will pay them off entirely in a lump sum.
I definitely see the merit of saving up a bit if your income is irregular but I’m rather into dollar cost averaging and I’d be afraid I would try to time the market with lump-sum contributions. I’d probably work more on making the income regular (through paying myself a salary and having a big buffer in my business-income account) than on making lump-sum payments.
We do monthly payments and add extra on them when we can. That way it doesn’t tempt us to spend it on other items instead of the intended goal.
Personally I like doing lump-sum payments. Our finances are always changing, so I like the flexibility of being able to pay when I can. There are times however, when I feel like I should be doing monthly payments. For example, savings. When our finances are more stable, I will probably automate a lot more.
We usually will make monthly payments, and then add a larger lump sum whenever we are able to…