What Is Automatic Savings and Is It a Good Idea for You? [CNET]

Grow your savings effortlessly with this super-simple strategy.

Saving money is a big undertaking. You may have to evaluate your budget, find ways to cut back and, in some cases, you may even need to retrain your brain. However, there’s one way to make saving a lot easier: Automate it. 

Whether you want to build your emergency fund or save up for a big purchase, read on to learn more about how automatic savings works and why you should start doing it today.

What is automatic savings?

Automatic savings involves setting up a recurring deposit into a savings account. This way, you know that a fixed amount of money will land in your savings account on a regular basis. 

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Should you automate your savings?

Ask just about any financial planner about the keys to building wealth and creating a plan for personal financial success, and automating your savings will be near the top of the list. Automating your savings is a route to help you consistently live below your means, says Elliot J. Pepper, CPA, CFP, financial planner and director of tax at Maryland-based Northbrook Financial. “Automate a monthly savings and investment plan so that you can force yourself to always spend less than you make,” Pepper said.

For example, let’s say you earn $4,000 each month. Instead of basing your budget on that $4,000, automating your savings helps you create a spending plan based on a smaller number. If you automatically deposit 10% of that — in other words, $400 — into a savings account each month, you’ll teach yourself to live on $3,600. Then, as your income grows, you can continue to put aside 10% of your pay. Later in your career when you’re earning $8,000 each month, you’ll be setting aside $800 on a regular basis. 

Benefits of automating your savings

Automatic savings can boost your finances in several ways.

You’ll never forget to set the money aside

This is perhaps the biggest benefit of savings automation: When you set it and forget it, you won’t ever actually forget to do it. With manual savings, if you get busy or decide that you want to go out for dinner one extra time this month, your savings balance may not grow. With automation, you don’t even have to think about it.

You’ll build wealth over time

At first, your automatic savings transfers may not seem like a lot. But all that money is building a bigger base for your long-term wealth, thanks to the magic of compound interest.

“There is a compounding effect to investing,” said Paul Deer, vice president, Wealth Private Client at Empower. “As your assets appreciate over time, all future gains are based on that larger base. The longer you can take advantage of that compounding effect, the better. In terms of savings, something like a high-yield cash bank account can help your money earn more money while it’s parked there.”

You’ll improve your financial habits

When you’re automatically saving money, you automatically give yourself less to spend. This is a practice that will serve you well as you work to figure out how to develop a plan for bigger goals like sending children to college and retiring.

You’ll establish consistency in your saving

Saving is like building a house: It’s not going to happen in a day. Instead, it requires a brick-by-brick approach. With that in mind, it’s critical to carve out a strategy that keeps adding those bricks every month of every year. If you work hard, you’ll eventually have the equivalent of a skyscraper with a beautiful view of the future.

How to automate savings account contributions

There are a few simple ways to automate your savings. If your employer pays you via direct deposit, divide your paycheck and deposit a portion to a dedicated savings account. Most financial experts recommend allocating between 10% and 15% of your monthly earnings to your savings when you’re just starting out in your career.

Most banks and credit unions also offer ways to automatically transfer money between your savings and checking accounts. You’ll need to log in to your online banking platform and set up a monthly automatic transfer from your checking account to a linked savings account.

Additionally, it’s important to note that every dollar counts when it comes to savings, and some institutions, such as Ally, offer programs that automatically round up spending amounts to the nearest dollar and put that extra change toward savings.

You still need to do some work

There aren’t any major downsides to automating your savings. However, a set-it-and-forget-it approach can make you feel complacent about your money management.

Even if you set up a recurring savings deposit, you still need to regularly review your finances to identify opportunities to save even more cash. Don’t let automation lull you into thinking you’re doing everything you can to save money. And be sure to leverage any big one-off cash infusions, such as a bonus or tax refund, when saving money.

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