If you aren’t saving enough money, you’re not alone. Recent data from Pymnts revealed that one-third of Americans aren’t saving any money at all -- a troubling statistic that highlights a lack of preparedness to deal with emergency expenses and planning for the future. (Personal finance experts suggest you have up to six months’ worth of expenses socked away in an emergency fund.)
While inflation certainly makes for money management challenges, it isn’t the only issue. As we return to “normal life” after the pandemic, plenty of consumers are tempted to overspend to make up for lost time. If you’re looking to hold on to more of your hard-earned dollars, one of the best -- and easiest -- strategies is to automate your savings.
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Should you automate your savings?
Ask just about any financial planner about one of the keys to successfully building wealth and creating a plan for personal financial success, and the importance of automating your savings will be near the top of the list. Elliot J. Pepper, CPA, CFP, financial planner and director of tax at Maryland-based Northbrook Financial, says automating your savings is a route to help you consistently live below your means. “Automate a monthly savings and investment plan so that you can force yourself to always spend less than you make,” he says.
For example, let’s say you earn $4,000 each month. Instead of building your budget on that $4,000, automating your savings helps you create a spending plan based on a smaller number. If you automatically deposit 10% of that into a savings account, or $400, you’ll teach yourself to live on $3,600. Then, as your income grows, you can keep that 10% intact. Later in your career when you’re earning $8,000 each month, you’ll be setting aside $800 on a regular basis.
Benefits of automating your savings
You’ll build wealth over time
You might not think much of the first few automatic savings transfers to your savings account. However, it’s important to recognize that all that money is building a bigger base for your long-term wealth, thanks to the multiplying magic of compound interest.
“There is a compounding effect to investing,” says Paul Deer, vice president, Wealth Private Client at Empower. “As your assets appreciate over time, all future gains are based on that larger base. The longer you can take advantage of that compounding effect, the better. In terms of savings, something like a high-yield cash bank account can help your money earn more money while it’s parked there,” he adds.
You’ll improve your financial habits
When you’re automatically saving money, you automatically give yourself less to spend. This is a practice that will serve you well as you work to figure out how to develop a plan for bigger goals like sending children to college and retiring.
You’ll establish consistency in your saving
Saving is like building a house: It’s not going to happen in a day. Instead, it requires a brick-by-brick approach. With that in mind, it’s critical to carve out a strategy that keeps adding those bricks every month of every year. If you work hard, you’ll eventually have the equivalent of a skyscraper with a beautiful view of the future.
You’ll never forget to set the money aside
This is perhaps the biggest benefit of savings automation: When you set it and forget it, you won’t ever actually forget to do it. Manual saving transfers run the risk of never happening. If you get busy or you decide that you want to go out for dinner one extra time this month, that savings balance may not grow. With automation, a machine has control.
Automating your saving: You still need to do some work
Ultimately, there aren’t any major downsides to automating your savings. However, a set-it-and-forget-it approach can run the risk of fueling complacency with your money management. Even if you set up a recurring savings deposit, you still need to make time to regularly review your finances to identify opportunities to save even more cash. Don’t let automation lull you into thinking you’re doing everything you can to save money, at least enough of it to meet your savings goals. And be sure to leverage any big one-off cash infusions, such as a bonus or a commission check, when saving money.
How to automate savings account contributions
There are a few simple ways to automate your savings. If your employer pays you via direct deposit, divide up your paycheck to deposit a portion to a dedicated savings account. Most financial experts recommend allocating between 10% and 15% of your monthly earnings to your savings when you’re just starting out in your career.
Most banks and credit unions also offer ways to automatically transfer money between your savings and checking accounts. You’ll need to log in to your online banking platform and set up a monthly automatic transfer from your checking account to a linked savings account. Additionally, it’s important to note that every dollar counts when it comes to savings automation, and some institutions, such as Ally, offer bank account programs that will automatically round up spending amounts to the nearest dollar to set aside that extra change for savings.
The bottom line
Automating your savings is a simple way to be successful with your personal finances. And in today’s market, with some high-yield savings accounts paying upward of 5% interest, every automatic deposit can have higher earning potential to help grow your balance.
It’s important to do more than save the bare minimum, such as having enough for an emergency fund; identify ways to spend less money so you can boost the size of those automatic deposits. And take advantage of various savings accounts, such as high-yield savings accounts, to help further boost your savings goals and bolster your financial security.
FAQs
Automatic deposits to your savings account help train your brain to save, by forcing you to work with less money in your checking account. By automating your savings, you’ll grow accustomed to having a smaller balance in your regular checking account.
Yes. By setting up a recurring transfer to a savings or investment account, you’ll set aside money for your future and train yourself to curb everyday purchases and live on less spending money in the present.
An automatic deposit means you don’t have to manually initiate a transfer of money between accounts. Instead, a predetermined amount of cash will automatically move from a checking account to a savings account, at a recurring frequency (the same day of each month, for example).
If you receive regular paychecks from your employer, set up a direct deposit that routes a portion of your paycheck to a savings account, with the remaining amount going to your checking. If you’re self-employed or receive sporadic payments for your work, program a recurring monthly automated transfer from your checking account to your savings account.