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Saving money is an important way to meet your financial goals. Whether it’s to start an emergency fund, save for a down payment on a house, or set aside money for a vacation when you automate your savings, it’s much easier to do. Let’s talk about everything you should know about how to create an automatic savings plan to achieve your next milestone.
What does it mean to automate your savings?
When people talk about automating your savings, they are referring to a personal savings system where one automatically deposits a fixed amount of money during certain intervals into an account. The most common structure of this type of automation is when an individual sets up an automatic transfer from their bank account into their savings every two weeks.
You may have heard of the phrase, “pay yourself first”. The idea behind this is to designate an amount that’s automatically transferred into a savings account for each paycheck. By designating your savings first, you can use the rest of your paycheck as desired.
When you automate your savings you are less likely
Why would you want to automate your savings in the first place? There are a ton of benefits to doing this including:
- Allows you to prioritize your saving contributions while reducing the temptations of spending those funds without making a plan.
- Prevents you from forgetting to make a deposit in your savings account in regular intervals.
- Saves you time. Making regular, automated contributions to your savings is very similar to turning it into a recurring monthly expense that you don’t have to spend time thinking about how much to save when to make a deposit, etc.
- Over time, you end up saving more. From month to month, when you make regular contributions you grow your savings.
- Can help you get out of debt faster. If you set aside a savings fund and contribute regularly to an account that’s geared towards paying down your debt, by automating it, you can pay off your debts faster.
- Will be less likely to fall short of your savings goal. When saving isn’t automated, we could get ourselves off track in some months when we are tempted to put other expenditures first.
- Automated savings will make it less likely that you’ll fall into temptation and spend on things that you don’t know.
- You’ll focus more on the bigger picture of your finances. Let’s say you work for a company that offers a 401(k) or similar investment plan. You might have a health insurance plan with a health saving account, a Roth IRA, and a high-yield savings account. That’s 4 accounts that you have to manually make contributions to. Automating it allows you to put your focus towards your financial goals instead.
- You won’t have to think about it. You aren’t’ seeing that money in your bank account so you’re less likely to think about using those funds towards things that you want to buy.
- The effort you have to put into developing good financial habits is minimal when you automate.
Should you automate your savings?
In most cases, automating your savings makes sense. There are some instances that it might not be an ideal way to save money. For example, if you have variable income, setting a fixed amount of money to set aside could be difficult. It could cause you to overdraw your bank account.
Another reason that automation might be a disadvantage is if taking a hands-off approach to your finances, you tend to forget the big picture of your finances. In that case, manually moving money to your savings would be a better choice.
Automatic Savings app
Technology has made our lives easier in so many ways and making savings automatic is among them. Here are five of the best automatic savings app to download on your smartphone:
- Digit – This allows you to save money based on an al algorithm. Available on Android and iOS.
- Acorns – A hybrid investing and savings app that allows you to round up your purchases to the nearest dollar. The difference is then invested in a diversified portfolio. Available on Android and iOS.
- Qapital – Another roundup app that allows you to also set up your own savings rules. Available on Android and iOS.
- Chime – Your spare change can be automatically sent to a savings account. If you have a direct deposit setup with Chime, you can have Chime move a percentage to your savings too. Available on Android and iOS.
- Current – You can set up savings goals and have money automatically moved to your selected goal. Available on Android and iOS.
Automatic Savings Plan
Creating an automatic savings plan is simple. It involves having your bank account linked to a savings, investment, certificate of deposit, etc. that are set aside for your savings goal. Here are three examples of automatic savings plan you can set:
- Have a set amount from each of your paychecks automatically moved when you get paid.
- Use a round-up app that transferred your spare change automatically to the desired account.
- Set up periodic savings transfers such as transferring $25 every Friday.
How do you automate a savings account?
Automating a savings account is easy and effective. Simply link your savings account to the checking account that your paychecks and other income flow into. Then you need to set up your specific savings rules, whether that’s transferring a certain amount each paycheck, every 10 days, etc. for the automation to follow.
How do I automatically transfer money to savings?
The types of automatic savings features that your financial institution provides will vary. Fintechs in particular tend to have more robust savings rules that you can set up. But at the most basic level, you should be able to set up automatic transfers to move money from your checking to savings on a particular time interval. It could be once a week, every two weeks, once a month, etc.
Should I keep my emergency fund separate from my savings?
An emergency fund is typically three to six months of your expenses that’s intended to be used in case of emergencies. For example, if you lost your job or your car broke down unexpectedly.
Your savings account should be used for specific financial goals that you have set. This could be money to be used for a new car, making a big purchase, etc.
The funds from your savings account are not intended to be used for the same things as an emergency fund. Therefore you should keep your emergency fund in a separate account for your savings.
Where should I keep my emergency fund?
- High-yield savings account
- Money market account
- Certificate of Deposit (CD)
- A traditional bank account that’s different from where you keep your money
How much should I have in an emergency fund?
Generally speaking, most experts agree that you need to have at least three to six months of your living expenses saved up in an emergency fund. If you are just starting to build an emergency fund, a good starting point is to save $1,000.
Once you have at least $1,000, you can work on building it from there. Consider all your critical expenses like housing, food, health care, utilities, transaction, debt, etc. when calculating how much you need to have saved. You might use an emergency fund calculator to help you get a realistic value.