Adding savings to our portfolios can be challenging for most of us. Between bills, entertainment, and other daily expenses, pushing money aside for savings can often seem like an afterthought. Automating your savings is a fantastic way to make wealth-building easy and almost effortless. Here's a very practical guide on strategies for automating savings, cutting stress, and helping you meet your financial goals.
Why Does Automating Savings Work?
One of the greatest benefits of automation is that it eliminates the need for willpower. Researchers point out that we make thousands of minor decisions to spend every day, which paves the way for making unnecessary spends and saving nothing. Automation eliminates decision-making, thereby developing a regular savings habit without even thinking about it.
According to Fidelity Investments, automated savers are 25% more likely to save compared to those who do not automate. It gives structure; hence, wealth building over time is much easier.
Steps to Set Clear Financial Goals
- Defining Specific Financial Goals: Think of why you want to save. Are you building an emergency fund, saving for a vacation, or preparing for a down payment on a house? To create a good foundation for yourself, use SMART goals. For instance:
- Emergency Fund: Save $1,000 in the next 6 months.
- Retirement Savings: Save 15% of each paycheck in a retirement account.
- Vacation Fund: Save $2,000 for a vacation next summer.
Having concrete goals enables one to stay focused on set targets and gives one a road map to follow.
- Open a Separate Savings Account: For automatic savings, you'll need an additional savings account-best if it's not so easy to get at. This way, you keep your savings out of everyday spending habits. While most of its interest will likely be small, online savings accounts also provide high-yield savings accounts that accumulate more interest than regular accounts, making your money work harder for you.
- Online Savings Account: An online savings account is a good choice because it often has fewer fees and higher interest rates. Forbes reports that high-yield savings accounts can earn between 0.50% and 2.00% APY, compared to the average 0.06% APY of traditional accounts. Over time, even a slightly higher interest rate can add up, especially if you're automating monthly contributions.
- Set Up Automatic Transfers: Once you have a separate savings account, you can arrange for automatic transfers from your checking account to your savings account. Most banks let you do this with online banking or mobile banking apps. For most people, a transfer that flows with their paychecks-transfers monthly or bi-weekly-deployed like clockwork-will suit just fine.
- Pro Tip: Start with an amount that feels attainable. For example, $50 every two weeks is $1,300 a year. You can always increase the amount as your finances improve.
- Financial Metric: A Bankrate report shows households that save automatically tend to save, on average, 15% more than those who save by hand.
- Get Benefit from Employer-Sponsored Retirement Accounts: If your employer offers a 401(k) or some other kind of retirement plan, take advantage of it. Contributions to these plans can often be made directly from your paycheck, which means saving by default is as easy as pie. Many employers match contributions, which likely means you're getting free money-for the most part, a matching program can double the value of your contributions. Minimize Taxes on Retirement Earnings
Contribute enough to qualify for your employer's match. This is essentially "free money" going toward your retirement. Suppose you earn $50,000 a year and contribute 5%, meaning $2,500 annually. If your employer is matching 100% of the first 5% you contribute, that's like the employer adding an additional $2,500 to your savings while doubling it.
- Automate Your Investment Contributions: In addition to a savings account and retirement plan, consider setting up an investment account on autopilot. An investment is an excellent means of accumulating wealth over time. Sending money in automatically eliminates the guesswork on when to get into the market.
- Utilize Savings Apps for Additional Contributions: Easy automatic saving can be made more effortless by a few apps - such as rounding up purchases to the nearest dollar amount, then go to deposit the difference into savings. Apps like Acorns and Digit offer "spare change" savings options, which are often imperceptible but increase over time. According to Acorns's internal report, the users save between $30-$180 per month with round-ups and automatic transfers. Although seemingly minimal, it sums up to a few hundred dollars per year.
- Set Up Automatic Bill Payments to Avoid Late Fees: Another group of bills that can be automated are savings, right along with the bills. By paying bills automatically, you ward off late charges. Provided utility companies, lenders and credit card companies have the facility of automatic bill pay, these bills will be paid on time, so no late fees or losing money through missed payments will be encountered.
According to Experian, late fees average between $30 and $40 per missed payment. Letting go of the fees means that more money remains in your savings account and your credit score will not be hurt.
- Track Your Progress and Adjust Where Necessary: One of the big benefits of automatic savings is that you can get to your financial goals with a minimal amount of effort, but it's a good idea to check in fairly regularly. Check your accounts and see how you are doing toward your goals. Sometimes you can raise your automatic contributions, sometimes you may have hit a goal sooner than you would have anticipated.
Life events like a promotion, pay raise, or taking on a new financial burden could mean that you need to adjust your savings plan. You can, for example, increase the percentage of your automated savings if you are given a salary increase. This way, you continue saving money even as your income rises.
Benefits of Automated Savings
Apart from convenience, there are other benefits associated with automating savings:
- Consistency: Automation allows you to save systematically, which is one of the most critical components of wealth-building.
- Saves Time: You will save time every month and no longer will you be bothered with the manual transfers if you set up a system.
- Less Stress: With automation, you do not need to fear that you might forget to save. Your financial goals are running in the background.
- Financial Metric: As per TD Ameritrade, automatic saving saves people 30% more confidence in their finances as compared to that of the people who keep saving manually.
Final Thoughts
Automating your savings is that superpower for the building of wealth with minimal effort. It makes it easy to set a goal and use separate accounts that help you benefit from employer matching. No matter if it's for an emergency or retirement, these simple steps will help make savings easy, consistent, and effective. Therefore, don't wait any more to automate your savings as small steps today will make significant financial progress tomorrow.
