How to Set up an Automatic Savings Plan
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
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 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?