A lack of savings is responsible for most financial emergencies, from bankruptcies to debt overload. Building – and maintaining – a substantial nest egg separates those who struggle financially from those who manage to keep their heads above water.
One critical way to build a savings pool is to automate your savings. Here, we explain what this means, how to do it, and how it can help you reach your financial goals.
What does it mean to “Automate” your savings?
Automating savings entails setting up tools to instantly draft money from your account. For example, each month, you can set up an auto-draft to pull a portion or percentage of your monthly paycheck into a separate account. Many IRAs and 529 accounts do this, but you can set up a regular savings or money market account through your bank of choice to serve the same function.
The point of “automating” savings is to take the guesswork and effort out of the process. Rather than spending time each month deciding how much money to set aside, the systems and processes you set up will do it for you.
How to automate
- Split your paycheck: Set up an appointment with your HR or payroll department to see if they can automatically divert part of your paycheck into a separate savings account.
- Set up a bank transfer: Meet with your bank to set up an automatic transfer process. When you do this, as soon as your paycheck hits your account, your savings amount will be automatically transferred away.
Why should you automate your savings?
Automating your savings is beneficial on several levels.
- You never miss the money. First and foremost, automatically reserving a portion of your paycheck for savings means you will never miss that money. In fact, you might as well deduct that portion from your paycheck, as you know that it will be “untouchable” and inaccessible to you, much like IRA funds.
- It saves you a step. Rather than expending the mental energy each month on determining how much you can – and should – save, your savings amount becomes consistent, predictable, and automatic. When you are already working hard to pursue your financial goals, taking one item off your plate can give you peace of mind and help you relax, knowing that you are, literally, saving money in your sleep.
- It curbs overspending. Making your money inaccessible means it is not available to you when your favorite store has a sale. If you don’t have the funds in your checking account, you can’t spend them. Period.
- It will accrue interest. Keeping your funds in a liquid form in a money market account means that, over time, they will accrue interest.
Few things are as motivating than seeing your savings increase. By putting even a small amount of money into savings each month, you will gradually see that amount grow – a great catalyst to continue to save more and more.
