Updated: Feb 1, 2021
Someone once said that if you’re looking for time, you’ll never find it. Extra time doesn’t just happen; you have to schedule it. So, whether you’re trying to start exercising, learn a new language or, in this case, save and invest money for your future, your time should be dedicated, pre-planned, and recurring.
But this time you’ve caught a lucky break.
Making a habit of saving money is much easier than forming other habits because you can put it on auto-pilot. In this post, we’ll discuss the power of automation and talk about some tools that can help you save towards financial independence.
The Power of Automation
The power of automating your savings is in removing the decision making from the process. It’s done. The decision has already been made. You set it up once and forget about it until you want to make changes. Regularly saving money without having to think about it is key to building wealth. Automating your savings is like going to the gym once and reaping the benefits of consistent exercise without having to ever workout again. Wouldn’t that be nice?
Pay Yourself First
Paying yourself first simply means that before you start paying restaurants and bars, hairdressers, gaming companies and clothing stores, pay your future self.
Your future self will be really grateful.
(It is funny when you stop to think about it—it’s easy to scold your younger self for not saving enough money, but it’s still difficult to start saving for the FUTURE you.)
Timing is the key to making this work. The sooner you pull your savings out of your paycheck the better. Waiting till the end of the month to put aside what is left over in your account is not a winning strategy. (Spoiler alert: most of the time, there’s nothing left over.)
Out of Sight, Out of Mind
For many of us, it’s not enough to set up an auto-transfer to a savings account that’s linked to our checking account. Keeping your savings in an account that’s displayed right next to your checking account makes it too easy to access. You need to psychologically separate the money you use day to day from the money that is not to be touched for many years. It’s much easier to do that if your checking and savings accounts are not side by side online.
In other words, when you’re getting started, you may need to essentially hide the money from yourself.
If you’re worried about dipping into your savings, consider a savings account at a different bank for your short-term goals. You’ll want to make sure emergency funds for car repairs or a water heater breaking down, is still easily accessible.
However, if we’re talking about long-term savings, placing those savings into a retirement account is always a priority.
Think of a retirement account as a savings account on steroids. For one, you’ll receive tax benefits just for contributing to a retirement account. Depending on the account, these benefits occur either at the time of contribution or when you’re ready to withdraw.
In addition, you are not charged any taxes when you buy or sell investments within your retirement account. And finally, in most cases, you are charged a penalty if you withdraw money before retirement age.
You might think that last point is a disadvantage, rather than a benefit, but the truth is many of us need our hand slapped when we try to take something from the cookie jar.
Consider reading our post on employee-sponsored retirement accounts to learn more.
Ways to Automate
Okay, getting back to transferring money to our savings accounts when we first get paid. This helps to remove the temptation to spend your savings since it’s already gone. As we mentioned,
Automatic Bank Transfers
This means scheduling money to transfer from your checking account to a savings or investment account.
This takes just a few minutes to set up online. You can usually find this option in the transfer section of your online bank account. If your savings account is with another bank, you can even set up your transfer as a bill pay to send a recurring check to your savings or investment account there. If you are unsure how to do any of this, you can always call your bank’s customer service department, and they will be able to guide you through the set up.
All you’ll need is the routing number and account number for the account into which you would like to deposit your savings—and you’re good to go!
Automatic bank transfers can be scheduled to siphons savings from your paycheck as soon as it is deposited into your bank account. But depending on your needs, there may be an even a better option out there.
Keep reading …
Direct Deposit Your Savings
Nowhere is it written in stone that you have to deposit 100% of your paycheck into a checking account. You can ask your employer to split up your paycheck to multiple accounts. For example, you can have 80% of your paycheck deposited into a checking account and 20% into a separate account of your choosing. Your HR department can get this set up for you.
The advantage here is that the money you are saving never goes into your checking account at all. This is one of the best options available to take advantage of the out-of-sight, out-mind-principle.
But what if you’re struggling to save anything at all, and the thought of putting 20% or 10% or even 5% aside is just too daunting? In that case, an app might be your best bet.
Savings and Investing Apps
A great way to automate your savings is to download a savings app onto your smartphone. These are easy to set up and provide the critical advantage of a set-it-and-forget-it approach. These apps are known as “micro-investing” apps since they allow you to start investing with as little as $5. All of these apps have straightforward monthly fees, some as low as $1 per month, depending on the features you are interested in.
It might sound counterintuitive to pay for an app that helps you save your own money, but if you struggle to save money, the automation and ease of these apps is well worth it. You can always cancel after a month or two, but we personally found these apps to be extremely effective when we were struggling to save money on a regular basis.
Let us introduce you to one of our favorites …
One micro-investment apps that we personally like is Acorns. The app’s slogan is “investing for everyone”. When you purchase an item with a linked card, the app will save and invest the change between your purchase price and the next dollar.
So, for example if you purchase a bottle of water for $1.45, the app will transfer 55 cents to your Acorns account and invest it in the stock market in a diversified portfolio. You also have the option to set up recurring deposits from your bank account to be invested.
Acorn simplifies your investment strategy down to 5 investment options that gauge your appetite for risk. These range from a conservative to an aggressive portfolio. You can connect as many credit cards and debit cards as you like to link to the service to round up your spare change.
Here is the pricing and highlights for each plan offered.
The $1/month plan offers an investment account with the 5 investment options based on your risk tolerance. The $3/month plan offers the investment account in addition to an Individual Retirement Account (IRA) they have dubbed Acorns Later.
Once your investment portfolio is chosen for your retirement account, it is managed by Acorns and cannot be changed. The portfolio will adjust over time as you get older but the initial selection cannot be altered.
This plan also offers a checking account with a debit card. It’s not exactly a full-service checking account—they do not provide checks or outbound wires, and your ATM withdrawals are limited to $500 per day—but they do offer mobile check deposit, no overdraft fees, and unlimited reimbursement of ATM fees within the U.S.
With the $5/month plan you get the investment account, the retirement account, and the most recent addition is the custodial account for children. This custodial account is a Uniform Gifts to Minor Act (UGMA) account.
Another point worth mentioning about Acorns is the special promotion they are offering for new parents. If you had a child in 2020 and sign up as a new customer by March 1, 2021, the $5/month family plan is free until the child is 18.
That’s savings in monthly fees of up to $1,080 with a free investment account, retirement account, and UGMA accounts for your children. If you’re fortunate enough to be able to take advantage of this offer, it’s a hard one to beat.
The biggest obstacle for most people is just getting started with saving regularly, and these apps can do just that for you.
You just download the app, answer a few questions about your risk level, and within 5 to 10 minutes, you are saving and investing. It’s definitely worth exploring for those who haven’t started saving.
If you’re not already saving on a regular basis, consider taking a few minutes now to decide how you can start saving today:
If you have any suggestions, thoughts or questions about the article or you would like to share your own experience when it comes to automating your savings, please leave us a comment below. We would love to hear from you.