“Automation is cost cutting by tightening the corners and not cutting them.”
– Haresh Sippy
It’s amazing how much of your life can now be automated.
Light switches, thermostats, locks, home security sensors, ovens, refrigerators, sprinkler systems, emails, grocery shopping; all of this can become bionic with just a handful of apps on your smart phone.
But can you automate your money?
Of course! Paying bills, tracking credit, updating your net worth—all automated. And most importantly, you can save money automatically.
Actually, automated savings has been around longer than anything I’ve just listed. And with everything else in your life that can be automated, if you DON’T automate your savings, I’ve got one question…
Not only does automating your saving make your life easier, it may be the single most powerful wealth accumulation tool in the universe. No joke.
Saving should be second nature to everyone, and it definitely shouldn’t be difficult. But the truth is, lots of folks don’t know where or how to start. I’m going to show you how to take advantage of this ridiculously simple, but ridiculously effective, financial technique.
Start with the Basics
Here’s what I want you to do. Pull out your smartphone, go to your bank’s mobile app, and transfer one dollar into your savings account. Just one.
You are now officially better at saving than 20% of Americans!
That’s right—according to Bankrate, 1 in 5 Americans don’t put any of their annual income into savings. This means that they’re missing out on one of the simplest—and most effective!—tools to build wealth and security.
Before we really get your automated savings plan running, start by figuring out what you want to save for. Simple, achievable financial goals are important.
Why? Because you want to feel a sense of accomplishment when your savings start to pile up.
A great goal to begin with is to set aside an emergency fund—I recommend 3-6 months of expenses in case an emergency or an injury occurs that could keep you from working.
Once you know the amount you need…break it down into smaller amounts to be transferred to your savings each month, depending on how soon you want to reach your goal and what your budget will allow.
Already have an emergency fund? Set goals for vacation, a new car, a child’s college education, and, of course, retirement. We’ll get to that later.
What if you don’t have any goals? No problem. Work your way to saving at least 10% of what you make. Once you get to 10%? Go to 20%!
One more thing before we move on: don’t forget that developing a savings habit can be a goal in itself. A goal that will always benefit you, not only in accumulating wealth and achieving financial goals, but even more importantly in attaining peace of mind and a sense of control.
Get Out of Your Way
Automated savings works much the same way as automated bill pay. Each month a predetermined amount transfers from your checking directly to your savings account or investment portfolio.
It’s as simple as that. Since you never see the money, it’s easier to part with, and chances are you won’t miss it.
Automated savings plans are, of course, perfect for people who receive a steady salary and can put away a set amount each month. But don’t discount the idea if you have irregular income from things like commission or freelancing.
Because here’s the thing. It isn’t about the amount you save, but about being consistent.
Let’s say you can put away $50 per week. That’s $10 per day–the equivalent of eating out for lunch on the week days. Not unreasonable, right? If you stick with it, that weekly $50 becomes $2,600 stored up in your savings account at the end of the year.
But let’s take it even further. Over the course of your career, if you automatically take $50 out of your checking account every week and put it into savings, that $2,600 turns into $104,000! And that’s before we’ve added interest and earnings, should you decide to invest that money in something other than a savings account.
Now we’re talking!
So determine the minimum amount you know you can afford each month. You can always increase the amount later. No matter how small it may seem, it will eventually add up to something much bigger.
Plan for the Long Term
Chances are, you will live longer than your parents did. In addition to that, you probably have a greater responsibility for planning own retirement, as pension plans and Social Security become smaller and smaller pieces of the retirement puzzle.
That’s why building a financial plan for retirement has never been so crucial. It’s also why automating your savings could mean the difference between a fulfilling, carefree retirement, and one spent biting your nails.
Don’t limit your automated savings plan to the money in your checking account. Go back further than that—to the source of your income—and start with pre-tax contributions to your employer’s retirement savings plan.
If you aren’t contributing to your 401(k), now is the time to start. At the very least, try to contribute enough to receive the employer match, if your company offers one. If you think you can go higher than that, do it. If you think you can max out your contributions, even better!
An automated plan is the cornerstone of your financial plan and the key to reaching your retirement goals.
“Do not save what is left after spending; instead spend what is left after saving.”
– Warren Buffett
When money is set to automatically transfer, you don’t have to worry about forgetting to make the deposit. It also eliminates any excuses that might come up to skip a payment.
Building good saving habits early can help protect your financial future. An automated savings plan will make the process mind-bogglingly easy!
Are you Financial Adviser Compatible? Take the QUIZ here to find out. Byron W. Ellis, CFP®, CLU®, ChFC®, CRPC®, is a CERTIFIED FINANCIAL PLANNER™ professional and Managing Director with United Capital Financial Advisers, LLC, a Financial Life Management firm. The information contained in this article is intended for information only is not a recommendation, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances
© Byron Ellis