We’re all busy: with partners, pets, kids, friends, jobs, dishes, laundry… the list goes on. And at the bottom of that list, for many of us, is saving money.
With so many competing demands on our time, attention, and wallet, it’s hard to prioritize our future selves.
What’s the solution? Not having to think about saving money. In other words, automating your savings.
“It brings another level of accountability, because we don’t have to remind ourselves each paycheck to save [money],” says investment advisor Peter Campbell.
“Oftentimes if we don’t intentionally automate our savings, we lose track of where our money went and end up not saving at all.”
Here’s why automating your savings is such a good idea, followed by how you can get started today.
Why you should automate your savings
Automating your savings is often called “paying yourself first.”
While it might sound a little strange, the concept makes sense: Instead of buying gas and groceries and pizza when you get paid (and therefore paying Exxon and Trader Joe’s and Papa John’s), you first funnel a certain amount into your savings accounts (therefore prioritizing YOU and your financial goals).
Thanks to technology, implementing this strategy is easier than ever. You can create automatic transfers from your checking to your savings accounts on a weekly, biweekly, or monthly basis.
This strategy has many benefits — here are three:
- It takes the pain out of budgeting: When you know your savings goals are automatically being met, you don’t need to agonize over whether you should splurge on that fancy coffee today. “Automated savings are key because they allow you to entirely avoid budgeting,” says Mike Morton, a financial advisor. “You can save toward your long-term spending goals automatically each month, and whatever is left in your everyday checking account is yours to freely spend!”
- It eliminates the human element: We like spending money, we get tired, we make mistakes — in other words, we’re human. “We face countless decisions every minute of every day, and we can end up suffering from decision fatigue,” says Eric Roberge, a certified financial planner. “That’s when we start making poor decisions because we’ve used up our available mental bandwidth… By removing the need to decide to transfer money to savings, you make it much easier to accomplish your goals.”
- It curbs lifestyle inflation: It happens to so many of us: As we earn more, we spend more — leading to that phenomenon known as “I have no clue what happened to that recent raise.” Automatically saving a percentage of your income can help prevent this. That’s why Jeremy Suarez, a managing partner at Tomoro, urges consumers to flip the traditional paradigm (earn, pay expenses, save what’s left) to one that puts your future first: earn, save what you can, spend what’s left.
Convinced about the power of auto saving? Follow these 5 steps to put it into action.
1. Open multiple accounts
Although everyone’s situation is different, most people should have at least the following four financial “buckets.” We recommend opening a separate account for each one, as that will make your finances easier to automate.
- Spending and bills (checking account): Your checking account should be your main spending account. After depositing your paycheck, you’ll transfer a portion to your other accounts below (that’s right: pay yourself first!), and then use the remainder to cover bills and discretionary expenses.
- Emergency fund (high-yield savings account): This ultra-important account protects you when the unexpected happens. It’s wise to house this money at a completely separate bank, so you won’t be tempted to spend it. Once you’ve saved at least three to six months of living expenses, let the money sit (and hope you’ll never need to use it). Use a high-yield savings account to accrue interest over time.
- Long-term goals (investment account): When we say long-term goals, we’re really talking about retirement. Even if it seems far away, remember that starting early is key. So, save for retirement in an individual retirement account (IRA) or 401(k), so you can maximize your returns over the next several decades.
- Short-term goals (high-yield savings account or money market fund): Wanna buy a house? Or a new-to-you car? Earmark this account for goals that are two to five years away. Use a high-yield savings account or money market fund to earn interest while you’re saving up.
When Caroline Vencil and her husband decided to buy a house, they were living on his paycheck alone, which amounted to $17,000 per year. To save for their down payment, they opened a savings account at a new bank, and automatically transferred money into it each week.
“I started with $25, thinking it would be tough. And when it barely went noticed, I increased it by $5 at a time until it felt uncomfortable,” Vencil says.
The Vencils saved their down payment of $3,200 in less than a year.
“Automating my savings actually changed my life,” she says.
2. Determine your contributions
How much you funnel toward each of the above accounts will depend completely on your earnings and your goals.
Your next step is creating a savings plan. What do you want to achieve? What can you afford to save?
When Lauren Mochizuki became a nurse’s assistant, she asked her employer to automatically transfer 15% of every paycheck into her 401(k).
“I completely forgot about it until two years later,” she says.
“I looked up the balance to find that I had over $20,000 saved!”
Let’s say you bring home $2,000 per month after taxes and health insurance. Your rent and other set bills (like credit card debt, car insurance, utilities, and student loans) amount to $1,150 per month.
Here’s how you might automate the rest of the money on a monthly basis:
- $500 remains in your checking account to cover groceries, gas, and other variable expenses
- $150 transfers to a high-yield savings account for your emergency fund
- $150 transfers to an IRA or 401(k) for retirement
- $50 transfers to a second high-yield savings account for short-term goals
With this plan, you’d be saving 17.5% of your take-home income each and every month — without lifting a finger!
If you have an irregular income, this will obviously be much more challenging. But you can still open each account, and set up small transfers that won’t be likely to cause an overdraft.
Then, if you have a good week, you can funnel the extra money toward your highest priority: perhaps paying down credit card debt or bolstering your emergency fund.
The most important thing is to get into the habit of paying yourself first. That way, when you get a raise or eliminate a bill, you can seamlessly increase the amount you’re saving.
“For those struggling to get started, don’t be afraid to contribute 1% of your income with the goal of increasing it down the line,” says R.J. Weiss, a certified financial planner and founder of The Ways to Wealth.
3. Set up your transfers
If your employer offers direct deposit, this is easy: Just ask if you can split your paycheck among different bank accounts.
That’s what John Pham of The Money Ninja did.
“I opened a new bank account specifically for an emergency fund. Then, through my employer, I changed my paycheck’s direct deposit settings to transfer 5% of my salary to that bank account. It was out of sight and out of mind. Now, it has enough for me to pay my expenses for six months,” says Pham.
Alternatively, you can open an online bank account that does the leg work for you: Chime, for example, lets you automatically send a certain percentage of each paycheck into your savings account.
Don’t have direct deposit? You can still schedule automatic transfers for a few days after you usually cash your paycheck, or on a particular day at the beginning of each month.
4. Round up the change
Another smart way to automate your savings is to sign up for a bank account that allows you to save each time you swipe.
Not to toot our own horn again, but at Chime, you have the option to round up each debit card transaction, helping you save money without thinking about it.
Say you make a purchase for $4.75 — we’ll take 25 cents from your Spending Account and deposit it into your Automatic Savings Account. The money will add up over time, without you even noticing it’s gone.
5. Slowly increase your contributions
Once you’ve set up your automatic transfers, your future is basically on auto-pilot. All you need to do is check your accounts regularly — perhaps every week, then eventually every month — to make sure everything’s running smoothly.
You should also try to increase your contributions over time. If you get a raise (go, you!) and start making $200 extra per month, don’t just boost your spending; boost your savings, too. Making conscious efforts to increase the amount you’re paying yourself will dramatically increase your financial security.
In conclusion, Morton, the financial advisor, says: “We underestimate the mental drain of having to make decisions on how to spend, what to spend on, and how much to save. Why revisit that each and every month? Save yourself the time and mental effort and automate your savings.”
Ready to start? Sign up for a free Chime account today.