Table of Contents
- Automatic transfers allow you to save money without manually making a transfer.
- Automatic transfers can help you stay consistent with contributing to your savings goals.
- You can set up automatic transfers within your bank’s app or website.
- To maximize the returns on your savings, keep your money in a high yield savings account or taxable investment account.
- It’s a good idea to automate other items, like bills and debt payments.
Introduction To Automated Savings
Automatic savings is a process in which a specific amount of money is transferred automatically to a savings account, typically on a fixed interval. This is a popular strategy because it doesn’t require the work of manually transferring funds, making it easier to save money without thinking about it.
Benefits Of Automated Savings
An automatic savings plan has a few main benefits:
- Consistency: Making manual transfers requires you to remember to transfer money at a given interval, which can lead to inconsistency. Automatic transfers, however, happen in the background without active thought. This allows you to consistently contribute to your goals on autopilot.
- Behavioral Advantages: When automatic transfers happen in the background, the money becomes out of sight and out of mind. This can help reduce the temptation to spend the money, which you might experience if you use manual transfers.
- Budgeting: If you struggle to stick to a budget, an automatic transfer can serve as a parameter for managing your money. You won’t be able to spend the money if it’s already moved out of your account before you spend on non-essentials.
Setting Up Automated Savings
To set up automated savings, start by determining how much you want to save. For a savings goal like an emergency fund, it’s recommended that you save around three to six months of your average monthly expenses. If you’re saving for a specific expense, like a vacation or new car, research the price of the expense to get a better idea of how much to save.
Then, determine when you want to have the money. Divide the total you need to save by the number of months you have to save the money to determine how much to set aside each month.
Now, log into your bank and locate the automatic transfer settings. Select the amount you want to transfer, the frequency you want to transfer it on, and a specific date you want the funds to deposit.
You can align the transfers with your paycheck dates to move a portion of your income to savings before you’re tempted to spend it. Alternatively, you can contact your employer’s payroll department to enroll your accounts in automatic savings deposits. This will allow you to receive a portion of your paycheck to your savings account and the rest to your checking account.
Maximizing Savings Returns
To get the most bang for your buck, store your savings in a high-yield savings account (HYSA) or taxable investment account. HYSAs offer higher interest rates than standard bank accounts, allowing you to earn additional money on your savings account balance.
Taxable investment accounts allow your investments to grow tax-free. This means that you won’t be able to take a tax deduction on contributions, but you’ll enjoy tax-free withdrawals later in retirement.
Automating Regular Payments
During this process, it’s helpful to automate other recurring payments like mortgage, rent, utilities, and credit card bills. This prevents you from being late on payments, incurring late fees, and the stress of managing varying payment deadlines.
Automating Debt Payments
For debt payments, like student loan payments, schedule these payments for automatic withdrawal. This will prevent you from being delinquent on a payment and facing a late fee.
If you decide to contribute an amount above the minimum payment, start with high-interest debts, like credit cards, to reduce overall interest charges. This is the avalanche method, one of the most-effective debt payoff strategies.
Retirement contributions should also be automated if possible. For employer-sponsored plans, like 401(k)s, reach out to your employer’s payroll or HR department to schedule automatic deposits from your paycheck to your retirement account.
For Individual Retirement Accounts (IRA), log into your investment account provider’s website and locate the deposit settings. Each provider will look a bit different, but there will be an option to set up automatic transfers from your bank account to the IRA.
Tools And Apps For Automation
Most banks and investment account providers allow for automatic transfers. For example, popular banks like Ally Bank’s HYSA and Capital One’s 360 Savings Account offer automatic transfer options with higher interest than traditional banks. Investment account providers like Vanguard, M1 Finance, and Fidelity also allow for automatic deposits.
If you’d prefer to use an additional app or platform to automate savings, consider the following options:
- Cleo: Engaging, fun automatic savings options like the Swear Jar method and roundups
- Acorns: Robust options for automatic roundups that get transferred into an investment account
- Qapital: Rounds change to the nearest dollar and sets it aside for specific goals
The Bigger Picture: Personal Financial Planning
Developing a strong savings strategy is key to having a comprehensive financial plan. That said, it’s just one small piece of a much larger puzzle. Once you have your savings under control, explore other financial products and decisions like insurance, mortgage rates, and taxes.
Saving money isn’t about just the short-term benefits of having extra cash in your account. There are long-term benefits of saving consistently, like lower stress levels and increased happiness overall. This makes developing a strong savings plan crucial for overall financial health.
If you have a unique situation or need personalized advice, consult with a financial advisor or other finance professional.