The Automatic Way to Build Your Savings
Photo courtesy of Lauren Hammond
I’ve learned a lot of really interesting money tips and tricks over the years.
I’ve learned that some of the best investment strategies are the simplest.
I’ve learned how to budget without actually sticking to a budget.
I finally figured out the right way to go about buying life insurance.
All those things have helped me, but there’s one tactic I learned years ago that stands out head and shoulders above the rest. It’s the one thing that more than anything else helped me increase my net worth over 8x since I started using it.
And the best news of all? It’s just about the easiest thing in the world to do.
The typical (ineffective) way to save money
There’s no big secret to building wealth. It’s simply a matter of spending less than you earn. That’s it.
So why can it seem so hard?
Well, there are two realities. For some people, there isn’t a whole lot of income coming in and that can legitimately make saving money pretty difficult.
But for others, they’re probably just doing it wrong.
This is what the process of saving money looks like for people who struggle with it:
- Receive your paycheck.
- Spend the rest of the month trying to limit your spending.
- Hope there’s money leftover in their account at the end of the month.
- If there is, try and remember to transfer some of it over to various savings accounts.
- But where should it go? Emergency fund? IRA? Savings for a house? DECISIONS!!!! AAARRRRGGGGHHHH!!!!
That’s a tough cycle with a lot of mental energy being expended. You have to LIMIT your spending. Then you have to REMEMBER that you want to save. Then you have to DECIDE if/where you want to save. And then you actually have to MOVE the money. And then you have to do it all over again the next month.
Whew! I’m tired just thinking about all of that!
And the truth is that if that’s your process, then you probably either won’t save consistently or won’t save as much as you want.
The automatic difference
But there’s a better way. Here’s what it looks like:
- Receive your paycheck.
- Within the next couple of days, automated transactions transfer money out of your checking account into the different savings accounts you’ve set up.
- The rest of the month, spend the remaining money as you please.
Wow! Now that’s a lot easier!
Quick note: If your income fluctuates month-to-month, here’s an expanded approach: How to Automate Your Savings with Variable Income.
There’s SO much power in this strategy
I can’t stress enough how much of a game-changer this was for me. It really opened my eyes to the power inherent in some of the simplest financial strategies. Whenever someone asks me for a single money tip, this is what I tell them. Every single time.
Here are the four biggest reasons why:
It’s purposeful – You set your goals and put your money to work achieving them. You’re directing your money to do what you want rather than reacting to whatever you have left over at the end of the month. This is the very essence of taking control of your financial future.
It’s easy – You set up your automatic transactions once and your job is done (see below for a how-to). No more remembering. No more worrying. It just happens. The only time you’ll have to think about it again is when you get a raise and want to increase you contributions.
It’s consistent – The most powerful tool you have in your savings arsenal is the ability to save early and often. This approach GUARANTEES that you’ll stick to a consistent saving schedule, meaning you’ll automatically be increasing your wealth month after month. It’s that kind of consistent repetition that produces BIG long-term results.
It’s guilt-free – Maybe best of all, it frees you up from the daily guilt and stress that comes from having to second-guess all of your spending decisions. Because your savings goals have already been automatically handled, you don’t have to worry about whether your impulse decision to pick up that candy bar on the way out of the grocery store will hurt your long-term plan. If the money’s still in your checking account, you can spend it guilt-free!
What can you use this for?
This strategy works for pretty much any savings goal you could possibly have. Here’s a partial list of things my wife and I have set up automatic savings for:
- Retirement
- Emergency fund
- Irregular fun spending (e.g. travel, gifts)
- Irregular un-fun spending (e.g. car maintenance, medical care)
- College savings
But those are just examples. Your own list will evolve from the ongoing process of setting your long-term priorities.
If you’re just starting out, focus more on getting one or two automatic contributions set up so you can see how it works rather than trying to figure everything out ahead of time. You can always make adjustments as you go. Nothing is set in stone.
How can you do it?
Once you’ve got your savings targets set, it’s time to get into the mechanics.
If you have a 401(k), your company will be able to help you set up contributions that come directly out of your paycheck. You can ask your HR rep if you’re not sure where to start with this.
For other savings accounts, including IRAs, you can set up transactions to come directly from your checking account on a set schedule (e.g. the same day of every single month, preferably a day or two after your paycheck is deposited).
Here’s how it’s typically done:
- Go to the website for your savings or investment account and sign in. This is the account you want to transfer money TO.
- Find the menu item that lets you transfer money TO your account there. It will probably have a word like “transaction”, “buy”, “transfer” or “deposit” in the title, though the labeling will be different for every bank.
- When you get there, you’ll have to add the information to link your checking account if you haven’t already (this is the account you’ll be transferring money FROM). It might take a couple of days for your bank to verify your checking account.
- Once your checking account is verified, go back to that transaction/buy/transfer/deposit page.
- There will either be an option that directly says something like “set up an automatic/recurring transaction”, or you just go through the regular process of entering a transaction and check a box to indicate that you want it to happen on a regular schedule.
- Set the amount you want to contribute, the day of the month you want it to happen, confirm the transaction and VOILA! You’ve set yourself up to make that contribution every single month without ever having to worry about it again.
If you’re having any trouble figuring out how to do it, just call up your bank and ask for help. Sometimes it can be a little confusing trying to figure out the right way to do this the first time, but they’ll be able to show you pretty easily.
Quick note: Here’s an expanded approach you can use if your income is inconsistent month-to-month: How to Automate Your Savings with Variable Income.
So get started!
Automation removes almost all of the barriers that make saving money hard. Once you set it up, you have to make an active effort in order to stop saving money. Otherwise your savings just keep growing and growing.
So my challenge to you is this: can you set up one automated savings transaction today? I don’t care how much money or where it’s going, just setting up one single transaction will set you on the right path.
Once you do it, please leave a comment and tell me all about it. I love hearing success stories.
You don’t know what you don’t have. Money can add up if you automate your contributions. I think that everyone should automatically be enrolled into their employer retirement plan for this reason. Of course, they have the option to opt out but many people don’t make that first initial step and they will most likely regret it later down the road.
Agreed. The more you can do to not even notice the savings, the easier it is.
I’m a big believer in automating as much as you can, especially the more saving/investing related items. We’ve been doing so for years and it just becomes habit over time as you get used to living on much less. The other nice thing is that it can help you achieve your goals without a whole lot of work. An issue we’ve run into recently though, is that we can’t automate contributions to our SEPs, as most brokerages don’t allow it. For some odd reason, it can be more difficult for us to deposit the money because we see it leaving. But, we’ve just committed to taking in a deposit each month to help us keep that mindset even though we can’t truly automate it.
That’s too bad about the SEP. You’d think they would want to make it as easy as possible to get a hold of your money!
One thing I did was setup a regular brokerage account at the firm I use. Then I automatically deposited the money into there, which meant it was already “gone.” Then once a month/quarter (whatever), I swept it from the brokerage account to the retirement account.
It was inefficient in that there was a lag factor in the money being invested, but it solved the psychology part of it.
Great idea! Whatever you can do to automatically get it out of your checking account and into a savings account is good in my book.
Automation can definitely be a big key to success. We set up automatic transfers of money from checking to savings each month, from checking to our HSA, and to save for my wife’s IRA. The money just moves. It’s gone before we realize it which is good…otherwise we would spend it.
That’s the way to do it!
We’re almost completely automated. It’s the only way to go. I have one very annoying bill that doesn’t allow credit card payments. Super frustrating.
Will they let you set up an auto checking account debit? I have a few bills that won’t take a credit card but will let you auto-pay through a bank.
They will, but I never give out my banking information to third parties. Plus I don’t want to have to keep an eye on the account balance. It’s my only manual bill, aside from my credit card bill, though, so it’s not too bad.
Have you tried setting up an automatic payment through your checking account, rather than through the payee? That’s how I do my rent. I set up a recurring payment through my checking account, whereby each month my bank sends a check for rent to my landlord’s address. From his perspective he just gets a check, same as if I wrote it, but I don’t have to think about it each month. (Plus, my checking amount tracks “available” balance, as well as account balance, and factors the uncashed check into the mix, which is great).
I have to admit that much of our saving isn’t automatic, mostly because of the fluctuations in our spending month to month and the fact that we zero out our budget. So some things, like my 401k and HSA contributions, are automated. But my IRAs and our big “next home” savings bucket aren’t on autopilot, perhaps to our detriment. I feel like if I pull the trigger on automating those, I’ll run deficits when we go over budget (which, for better or worse, is almost every month since we have no built-in monthly wiggle room).
I would only worry about it if you actually find yourself missing your savings targets. If not, no worries.
But if you aren’t saving as much as you want, I would probably take another look at your pretty sizable savings cushion rather than your monthly budget. My guess is that you could handle going over-budget in some of your spending areas pretty easily, so why short-change yourself on long-term savings goals?
I think you meant “save more than you SPEND”— not “more than you earn” .
But if you could save more than you earn…. it certainly would be a great way to attain wealth !
Good article……
Yes! What I actually meant was “spend less than you earn”, but clearly that got a little jumbled. Thanks for the catch! It’s been updated.
I agree, Matt. Automation can make it so much easier and more importantly – remove a bit of the human element. We are so good at justifying why we can’t save this month and promising we’ll do it next month. This removes that option for us and we learn to live on what money we have remaining. Otherwise it can way too easy to spend that money instead.
Yep, the more we can do to take the decision off the table, the more likely we are to make the saving actually happen.
Great post, Matt. This is kinda like the Wealthy Barber concept, and it works!
Absolutely. Simple and incredibly effective.
I’ve been “paying myself first” since my first job. My parents taught me to take a percent from my pay and put it away. Then I could spend the rest as I saw fit. Of course, I still had to have money to put gas in the car!
Haha, well yeah you still have to manage the rest of your money. But this is a good start.
Thanks for this article it’s brilliant – have finally automated my savings at 32 after years of hoping to somehow save (lol)
You’re welcome! Good to hear that things are on track 🙂