How To Automate Your Savings

Spending money is often fun. Saving money rarely is.

The problem is saving is a necessity if you want to be prepared for emergencies, college tuition, retirement and life’s other twists and turns.

Actually, the problem is a lot of people aren’t preparing. The personal savings rate in 2023 was 3.8% of a person’s total income. That was about 5% below a decades-long average, according to the U.S. Bureau of Economic Analysis.

You could blame it on inflation, recession, expiring pandemic relief programs or Jeff Bezos needing a bigger yacht. Whatever the reason, it’s a troubling trend.

How can you avoid it?

Automate, automate, automate!

Automate Your Savings: An Easy Way To Financial Security

Money that is automatically transferred from your paycheck to your savings account is money you don’t miss. When life takes a twist or turn, you’ll be glad that money is there.

Here’s how to get started on that road to financial stability, not to mention peace of mind.

Enroll In Your Employer’s 401K Plan

Enrolling in your employer’s 401K Plan is perhaps the easiest way to automate savings. You may already be contributing 3% of your paycheck without even knowing it, as employers are required to auto-enroll employees upon hire. Talk to your employer and see if you already have an account.

Many employers have a matching program, meaning they will match your investment up to a certain point. For example, if they match “up to 6%” of your salary at 100%, and you make $45,000/year, you can contribute $,2700 (6% of $45,000) and they’ll contribute a matching $2,700. That means, $5,400 will be contributed to your account for one year.

Contributions to 401K plans are pre-tax, as well, meaning it won’t cost you $2,700 to contribute $2,700. Depending on your tax bracket, it may cost you 15%-25% less.

If you suffer financial hardship, you are eligible to borrow from your 401K (for most plans, up to 50% of the plan’s value) without paying a tax penalty. When you consider the tax savings and the contribution from your employer, investing in a 401K plan is a great way to automate your savings.

Direct Deposit 10% to Savings

You should set up an automated direct deposit from your paycheck to a savings account. This way, you won’t have to think about setting money aside each month. Essentially, you’ll be paying your savings account while you get paid. This is known as “paying yourself first,” setting aside savings before you pay your bills and pay for discretionary items.

Why 10%? Experts recommend it so that you’ll have enough money, over time, to retire. If 10% is too much for you right now, consider 5%. Even 3% will add up to a healthy emergency fund over time.

Direct Deposit Money to an Investment Account

Have a portion of your paycheck directly deposited to an investment account such as Scottrade or Charles Schwab, where you can invest in mutual funds. Choose a well-established fund with a good rating and good rate of return over the past 10-15 years. If you can, start from your first paycheck. The compound interest will work magic over the years.

6 Tips For Automating Your Savings Successfully

Automating your savings is wise, but true savers do it as efficiently as possible. Here’s how to maximize your results.

Choose a High-Interest Savings Account

High-yield accounts can be 10 times as generous as many bank savings accounts. Consider that the national average savings account rate was 0.46% in 2023, according to the Federal Deposit Insurance Corporation (FDIC). Yet some banks were offering rates above 5%.

But a word of warning: Check the balance requirements and potential charges. Fees for “account maintenance” or penalties for dipping below a balance minimum can eat into your savings.

Set up Recurring Savings Transfers

Many banks offer automatic transfers to savings at predetermined times, like biweekly or monthly. The transfers are tailored to your budget needs and to help ensure you don’t overdraw your account. You could set up a recurring withdrawal of $50 from checking to savings every payday.

Define Goals by Utilizing Multiple Savings Accounts

Having multiple saving accounts can help you stay organized and focused on different savings objectives. For instance, one account could be used to save for property taxes or insurance bills. Another for a down payment on a house, another for vacation, another for hip-replacement surgery for your dog, which can run as high as $7,000 per hip if Fido is in really bad shape.

Use Budgeting Apps to Track Your Progress

There’s an app for everything these days, so you can easily find one that helps you monitor your progress toward savings goals. Some banks offer budgeting apps with their savings accounts. Having such information at your fingertips can keep you motivated as you watch your savings grow.

Round up Purchases to Savings

Every penny counts and they can add up using round-up savings programs. They automatically increase your debit card purchases to the nearest dollar amount or an amount of your choice. The difference between what you actually pay, and the rounded-up amount is transferred into your savings account.

As Your Paycheck Increases, So Should Your Savings Amount

Whatever percentage of your paycheck you may be depositing every payday, maintain it as your paycheck gets bigger. You’ll still have more money in your checking accounts, so shouldn’t even notice the added juice going into savings.

Some 401K plans offer automatic escalations. These let you increase the percentage you contribute toward retirement every year until you reach a target percentage.

Additional Savings Information

The tips above are useful, but they are all rooted in desire. It’s tempting to want to pay your bills and blow the rest of your paycheck on life’s pleasures, but you’ll likely regret it if your kids have college plans, or you turn 65 and realize you can’t retire until you’re laid to rest.

If you need a kick in the financial butt to get going, nonprofits like InCharge Debt Solutions offer free financial counseling. As you develop a budget and savings strategy, here are a few common considerations:

• Find the Best Bank For You: As we noted earlier, interest rates on savings accounts vary wildly. If your bank is on the low end, shop around. Besides the basic rate, consider the bank’s fees and other potential charges and extra benefits it may offer.

• Find the Best Ways to Start Saving for College: College is not for everybody, but if it’s in your child’s future you need to be ready for sticker shock. The average yearly tuition for public, four-year colleges was $10,740 for state residents and $27,560 for out-of-state residents in 2022, according to College Board data. Kids grow up fast, so don’t wait to investigate 529 college savings plans, Roth IRAs and other means to pay the big bills that could be heading your way.

• How To Save For Retirement: Not everybody has kids, but everybody will eventually retire. It can take decades to build a suitable nest egg, so it should be a focus of your savings strategy. With proper planning, you can make your golden years shine.