Invest

how to invest

Live

career, food, travel

Save

saving, credit, debt

Protect

insurance, security

Retire

401K, IRA, FI, Retire

Home » Banks, Personal Finance Planning

How to Set up an Automatic Savings Plan

Last updated by on 8 Comments

We all know we should save money. We really do. But let’s be honest: spending feels so much better than saving. You could be wearing, driving, or living in your hard-earned money instead of letting it collect dust inside a cold, damp vault in the back of a bank.

If that’s your outlook, it’s time to change our mindset and look to why everyone should be focusing on building up savings. After all, our entire financial futures are at stake. An automatic savings plan is the way to do it.

Why an Automatic Savings Plan is Essential

automatic-savings-plan1. Saving for Emergencies

A savings account can act like a sort of fire extinguisher when an unexpected catastrophe puts fire to your wallet. It’s a good idea to have three to six months of living expenses socked away in case of a job loss. That might take some time to build, so in the meantime, put aside $1,000 to help pay for sudden expenses. Then, build your ideal emergency savings fund.

2. Saving for retirement

You’d like to stop working at some point, right? Of course, you do. Well, without money in retirement, how do you expect to pay your bills after you’re no longer working? Saving money for retirement helps ensure you’ll have money to cover necessary expenses (and some luxuries) during your golden years.

3. Saving for a vacation

A lot of people don’t think twice about putting a vacation on a credit card. When you do it that way, you end up paying more for your vacation that it actually cost. That’s because the credit card balance accrues interest until you pay it off completely. But, when you save up for a vacation, everything’s paid for in advance. You can also relax without worrying about the credit card debt you face when your vacation’s over.

4. Saving for financial goals

The most coveted things in life are also the most expensive. A house, a car, and an education are all things you have to work toward. Putting money away makes each of those easier for you to reach.

Why You Should Save Automatically

No matter how much you realize that saving is important, it’s still not as easy as it seems. There’s just something about parting with money without an immediate benefit that makes saving boring. Before you give up on saving all together, consider making your savings automatic.

When you save automatically, the money automatically deposited into your savings account on some periodic basis. For example, you might have $100 automatically deposited into your savings account each month. After a year, you’d have at least $1,200 saved up, more if your account has a good interest rate.

As a result, your financial future is no longer based on your will-power – it’s just going to happen.

How to Plan Your Savings

Trying to understand personal finance without a heavy dose of financial planning will get you no where fast. You have to know what your goals are before you can determine if you’re doing the right thing. You always need to plan your finances.

Saving money is no different. Before you set up your automatic savings, you have to figure out three things.

How much will you save? Coming up with the answer to this question can be easy or hard. If you have a written budget that you use to manage your money, it will be easier to refer to your budget to see how much you have left over for saving. On the other hand, if you don’t have a budget, you’ll have to do some calculating to see what’s left over after you pay bills.

How often will you save? Base the frequency of your automatic savings on your pay periods. If you get paid once a month, then save once a month. If you get paid every other week, then save every other week.

What are you saving for? You should have a savings goal. Without one, it will be easy to stop saving and start spending the money on something else.

Once you’ve made those critical decisions, you’re ready to move on and make your savings automatic.

How to Set up an Automatic Savings Plan

There are two basic ways to save automatically, and either one works perfectly fine depending on your situation.

1. Automatic Savings through your Bank:

Save automatically, just divide your bank accounts into two: the account where you spend money, and the account where you save money. Every month, have X% automatically taken from your checking account and placed in your savings account.

You just made your savings automatic.

If you’re comfortable with computers at all, then a high-yield online savings account is probably your best shot. One of the benefits of having an online account is that it keeps your money far enough away that you can avoid spending impulses, but close enough to reach in an emergency.

Make sure set your automatic transfer to occur close to the payday, but not before. That way you can be sure the money is available and you won’t have to deal with a potentially expensive overdraft.

If you choose not to open an online account, check with your bank to see if you can connect a savings account to your existing checking account and set up a recurring transfer from one to the other.

2. Automatic Savings from Direct Deposit

Finally, if your employer uses direct deposit, you might ask your human resources or payroll department if you can set up a direct deposit for two accounts. You would have your savings deposited into your savings account and the remainder into your checking account.

The best thing about automatic savings it that once you set it up, you don’t have to worry about saving again. You can monitor progress toward your financial goes without feeling the sting of losing money. In some ways, it’s like getting paid twice.

Automatic Savings Discussion:

  • Do you have an online bank account? Where?
  • Do you have your savings set automatically?
  • Do you have any tips for making the process smoother or more effective?

Related Posts:


About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You'll also find every post by category & every post in order.


8 Comments »
  • allen says:

    i use ING, but their interest rate has gone down, recently. Their online & live support is great, however. I have $5 a week taken out automatically for my sister’s wedding later this year. it’s a small enough amount where i never notice, but it’s still $20 a month!

    I have my paycheck split into four accounts, for paying my bills auto-magically (one for mortgage/taxes/condo-fees, a savings for insurance, and another checking for paying car/car-insurance: I like to have my accounts separated into type, that way i know very quickly where i am. i also keep that extra money stashed in those same accounts. God forbid i get canned, the money is already in the accounts that pay the bills: just make sure i have the extra months already there), and one for general purpose stuff.

    for those who get paid every other week, like i do, you get two “extra” pay-checks a year: LEAVE that money in your account! think of it as a jump-start on your emergency fund!

  • Shaun says:

    Allen,

    Great idea about the sister’s wedding. My sister is getting married in a few months, and I just might follow suit. Come to think of it, I need to figure out what I’m going to get her. ;-)

    I’ve heard both good and bad things about ING — I use a local bank. If I went with an online account from somewhere not local, I’d try MoneyAisle.com. It looks like a brilliant little service that lets banks bid for the saver’s money. :)

  • allen says:

    I, personally, feel that instead of getting a 15 year mortgage, people should get a 30 year: you can still make payments as if it WERE a 15 year, but you have the safety-range, in case something happens.

  • Laura says:

    Shaun:

    What a great article. It is good to hear a voice of reason in these turbulent topsy-turvy times. Thanks for the good advice.

  • Shaun says:

    I think the length of a mortgage really depends on the financial situation of the person making the payments, and what kind of a house they are trying to acquire.

  • Sue says:

    Years ago, when our friends daughters were getting married, I asked, “where does the money come from for a wedding?” I had been saving for college expenses, but saving for wedding expenses was a new concept … to me. I opened another savings account with a target amount set aside for each of our three children. With time on our side, saving was relatively painless.

    Our oldest son married in January 2009. The savings allowed us to enjoy the celebration stress free. By having a target amount already saved, we had our budget too.

    When all wedding related expenses are paid, the balance in the account will be gifted to our son and new daughter.

  • Megan says:

    I use ING for my online savings, and it’s awesome! I have 3 accounts set up- one for each goal.

    -Emergency- I put $50 in this per month, $25 out of each paycheck
    -Taxes- I put a percentage of all the extra money I earn freelancing
    -Couches- I put in $90 a month to pay off the “zero interest for 12 months” deal I got when I bought my couch and loveseat last December

    I don’t do the automatic transfer thing, but I suppose I could for the emergency account.

    The good thing about these accounts is that there’s a waiting period to transfer the money- so I don’t spend it on something I don’t need, but I can still put an emergency purchase (like an insurance deductible) on a credit card and then pay it off within days.

  • Andy says:

    Nice post. As the guy said above, some things are really natural and almost obvious, but it’s easier to plan things and think about it when we’re able to read it in such a well written post. Thanks a lot man, I’ll be looking for your posts in future…

    PS: Some of these comments are also helpful, I just find this blog today but I’m already enjoying it lots.

SPEAK YOUR MIND

Enter your:


Home | Sitemap | Terms | © 20somethingfinance.com