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:
- 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.