Automate Your Savings Contributions


by

27 January,2014

One of the best things you can do for your savings plan is to automate it. Too often, we view savings contributions as “optional” in our finances. We spend on everything else, and if there is something “left over”, we decide to go ahead and put money in the savings account.

Unfortunately, this strategy of saving is likely to just put you in a position where you aren’t saving nearly enough. You might not be saving anything at all!

If you plan to take your saving to the next level, it makes sense to automate.

How to Automate Your Savings Contributions

There are two main ways to automate your savings contributions:

  1. Directly from your pay check: Many employers will let you designate a direct deposit to any account you wish. You can have that money directly deducted from your pay check and placed in a savings account, or in a retirement account. Find out how many ways you can split your pay check ahead of time, though. If you can only choose one account in addition to your primary checking, make sure that your savings contribution goes to your tax-advantaged retirement account.
  2. Automatic transfer: If you can’t have the money directly deposited into an account, you can set up an automatic transfer. Every month, I have money automatic transferred from my checking account into my IRA. I also have money automatically transferred to my emergency fund, which is held in a taxable investment account.

When you set up an automated savings strategy, it’s important to make sure that you account for the fact that the money is already claimed. Don’t even consider it as part of your “discretionary” income. When creating your spending plan, make sure that it isn’t included in money that you can spend on entertainment.

If you want to make saving a priority, you have to stop thinking of that money as “available”. It needs to be moved up on the “must” list, and you need to make a point of setting that money aside. Whether you have a short-term savings goal, or whether you are saving for retirement, it’s important to put saving high on your spending priorities list.

You Don’t Have to Use a Traditional Savings Account

The good news about setting aside money automatically is that you don’t have to use a traditional savings account. I find those depressing anyway. The yield is so low it almost doesn’t make up for the extra liquidity. I have a small amount that I keep in a highly liquid “high yield” savings account, but most of my savings go into investment accounts. My tax-advantaged retirement account (Roth IRA), is used for long-term savings, and the bulk of my emergency savings are kept in a taxable retirement account. In a pinch, I can access the money in the savings account, and if I need more, what’s in the savings account holds me over until I can sell some investments.

The important thing, though, is that my savings contributions are automated, so I don’t have to remember to set that money aside. In fact, that money isn’t even available for me to touch.