UPDATED: April 21, 2022
Saving money can be challenging. If the money is in your account, it’s hard not to go out to eat, buy a new pair of sneakers, or go away for a long weekend. Saving money often feels like you are delaying the joy of today in hopes of a better tomorrow. Instant gratification is certainly hard to combat. Understandably, saving money is a key component to one’s personal financial plan, but there’s no denying it can be the most challenging. How do you win this fight? Automate Your Savings.
Set it and forget it.
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Automate Your Savings
Automating your savings is when a specific percentage, or dollar amount, comes out of your paycheck each pay cycle and is automatically deposited into an account of your choosing. For instance, if you are currently enrolled in direct deposit, 100% of your net pay is likely going into your primary bank account. Let’s assume that amount is $1,000 every week.
You can change that distribution split. You may elect to deposit $200, or 20% of your net pay, to a separate savings account, and the $800 balance will be deposited in your main checking account. Therefore, you can keep your savings completely separate from the income you use every month for expenses, while building up a cash reserve.
How Much Should You Save
Understanding how much you should save is important. Ideally, one would be saving at least 20% or more of their monthly income. That number may feel out of reach, but it’s a great goal to work towards.
Your income should be spent in three areas; essential, discretionary, and savings. If you are struggling to save 20% of your income currently, look to reduce your discretionary spending to help you accomplish this target.
Where Should Your Automated Savings Go
Emergency Funds – The first savings account you should look to build is an emergency savings account. The best way to start an emergency account is to open a separate savings account at your bank.
The only money you put in this account is socked away in case an emergency happens, such as a gap in employment, accident, or an unforeseen medical expense.
401(K) – Once your emergency account is established and properly funded, it’s time to look at ways to grow your money through various investments. A 401(K) is a great tool to do that. This financial tool is designed with your retirement in focus. Despite how powerful a 401(K) is, millions of Americans do not have one set up.
If your employer offers 401(K) benefits, you should consider getting involved. By doing so, you can deposit either pre or post-tax dollars in this investment vehicle each pay cycle. Your money is then invested in various markets, mutual funds, bonds, etc, and has the ability and potential to earn interest and appreciate over time.
As the investor, you are able to select which investment options are best suited for you. You may choose to take on more risk in hopes of generating a greater return, or you may choose to leverage the 401(K)’s retirement date funds.
Additionally, many employers offer a ‘match’ on 401(K) contributions, which increases how much money you can sock away each year.
IRA – If your employer does not offer a 401(K), you still need to focus on saving and the long term goal of retiring. This is where an IRA, or Individual Retirement Account, can step in to help. There are three main types of IRA’s for your consideration.
- Traditional IRA – This is when you make contributions to this account with your pre-taxed income, and your money can potentially grow tax deferred until you reach your retirement years. Once you’ve reached retirement and begin withdrawing your funds, you will pay taxes on that money.
- Rollover IRA – Is when an individual takes their money from a previous qualified retirement plan and rolls it into an IRA. This typically occurs when someone leaves a job where they had a 401(K) and joined a company who doesn’t offer a 401(K).
- Roth IRA – Is when you contribute to an IRA with money you’ve already paid taxes on. The same investment risks are involved, but in retirement when you withdraw your money, you do not pay taxes on it.
You can visit most major financial institutions to set up an IRA. You can also automatically contribute a fixed percentage of your income to your IRA account each pay period.
Brokerage Account – Another common way people save money is through a brokerage account. You may enjoy investing in stocks and managing your own personal portfolio. Or, you may work with a financial advisor who manages your assets for you.
Most major banks offer a brokerage service, and you can get your account created from the comfort of your own home. Similar to the above, you can automatically direct deposit a fixed amount, or percentage, of your paycheck into this account every pay period.
Goal Specific Fund – This looks a bit different for everyone. One person may be saving for a down payment on a house, whereas someone else may be saving to pay for their next car in cash.
Similar to an emergency fund, you can set up an additional savings or checking account at your current bank. Automatically deposit whatever amount you desire from your check each pay period, and make progress towards your goal.
You Can’t Spend What You Don’t See
Saving money can be a daunting task. It takes financial discipline to save, and it is a continuous effort. Once you establish how much money you can and should be saving, you need to simplify the actual practice of saving money.
The easiest and most powerful way to do so is to automate your savings through various saving or investment vehicles. The money will automatically come out of your paycheck and will be deposited into an account of your choice. Therefore, you physically can’t spend the money as it’s far removed from your checking account.