Who is this for?
“AS” is ideal for people with an income source that is deposited at regular intervals. (So that you can schedule automatic deposits based on when funds hit your account).
A person who is motivated to start deliberately saving for their future, but always finds at the end of the month there’s nothing left to save.
AS is a good solution for people who often forget to save or just spend everything they earn. It forces you to budget and cut back.
Individuals who want to avoid the pitfalls of income creep spending habits can also benefit from AS.
The problems with the current method
We save what we have after spending when it should be the reverse (spending what we have after saving).
Psychologically, seeing money stack up in your checking account makes you think you can afford impulse purchases when really you’re just neglecting to save.
Why not intentionally choose for ourselves to spend only what we have after saving?
You will only begin building wealth when you start to realize that a part of all the money you earn is yours to keep. That is, pay yourself first.
The Richest Man in Babylon
What is automated savings (AS)?
Simply put, it’s using your savings account’s reoccurring money transfer function to deposit funds at pre-determined intervals into other accounts. Which in turn, allows you to save with only needing to think about it once (when you first set it up).
With AS you are taking control of your own financial future and determining your savings percentage.
You know all those subscriptions you have that you forgot you signed up for 6-8 months later? Well, think of automated savings as a subscription for your financial future (cheezy I know, but it’s true!).
Different ways to implement it.
The typical structure is having an automatic transfer from an individual’s bank account to a savings or investment account at an interval of once every two weeks or once per month.
There are two ways to set up transfers:
1. Direct siphon from your payroll (you never see the funds).
This is what most people are already doing for their taxes if they are an employee and get paid by direct deposit. (According to the National Payroll Association’s annual Getting Paid in America survey, 92.8% of Americans get paid via direct deposit.)
The reason you are most likely already doing this form is because Employers set aside a portion of payroll for State and Federal taxes.
Another example of this is your 401K, which once set up, automatically deducts and deposits into an investment account. And you never even see it hit your checking account!
Additionally, if you have an HSA account you can have the 33633funds drawn right out of your paycheck without ever seeing it.
2. Auto transfer from your bank account (after payroll is deposited).
Most banks allow weekly, monthly, or annual intervals for transferring funds to other accounts.
When depositing into your Roth IRA, 401K, or brokerage account you can also automate a purchase of equities, index/mutual funds, or even bonds within the account!
This allows you to dollar cost average AND you’re removing a portion of the emotional decision-making process since it going to happen automatically (Not a good strategy to buy high and sell low FYI).
Will opening multiple bank accounts hurt my credit score?
Opening up additional banks does NOT have any lasting impact on your credit score since it’s a soft pull. However, as a general rule don’t close banks or cards as it hurts your credit length (Separate post but must be mentioned).
How hard is it to set up automated transfers from your bank?
While writing this article I set up a monthly automated deposit for my Roth IRA and Emergency Fund.
It took me less than 15 minutes to do both (Using Fiedlity and Chase).
Automated savings is simple to set up and you can do it today through your bank’s online banking platform or through apps such as Qapital. I personally just have it set up internally with my online banking. If you use apps like the ones mentioned above, you get the benefit of having access to algorithms that allow you to monitor your spending habits and automatically transfer small amounts of money, while also having features like customizing savings goals, tracking your progress, and monitoring your spending.
Setting up automated savings through a bank’s online banking platform is a simple process that typically involves logging into your account, navigating to the “transfers” or “automated savings” section, and then setting up the amount and frequency of the transfers. Many banks also provide the option of customizing the transfer schedule to suit the individual’s needs.
Should you open a new bank account?
You could implement (AS) within one bank account, but I like to separate my money as much as possible since I believe in the out of sight out of mind philosophy (and let’s be honest saving is like 95% a mental game).
I will create a separate post about setting up an emergency fund and the optimal way to go about doing this to maximize the interest earned on your money.
How should you allocate your savings?
Bi-weekly or monthly?
This just depends on your payroll schedule and when your recurring big bills are charged (rent, mortgage, car payment, etc.)
How should you structure the fund allocation?
This is a personal preference.
As an example, let’s say you want to save 25% of your earned income. Say you make $50,000 per year. To be conservative you’re paying Uncle Sam ⅓ which is $16,500. That leaves you with $33,500 to live off and save or $2,792 per month. You said you wanted to save 25% which comes out to $12,500/year or $1,042/month.
If you have five different accounts you’re saving for then you want 5% of the $1,042 monthly savings allocated to each of them. So you would set up a monthly deposit of $208.33 into all five accounts or you could set up a bimonthly deposit of $104.
After your savings and taxes, you’re left with $1,750 to spend on rent, car payments, groceries, weekend benders, etc.
Automated savings should help draw a clear line in the sand for your spending habits
Fund ideas
This is definitely the fun part in my opinion. You get to be creative with how to allocate those precious hard-earned dollars of yours. We’ll start with the basics and work our way into the cool stuff.
401K up to employer match
Invest into your 401K at least up to the employer match. Then put as much extra in as you deem necessary.
Roth IRA
Max it out. That’s $6,500 per year starting in 2023
HSA
If your employer offers this, it’s definitely the way to go over traditional health insurance if you’re a young healthy individual who goes to the doctor 1-3x/year.
Max contribution for a single filer in 2023 is $3,850
Emergency Fund
You’re building your money bug-out bag for when disaster strikes. Also, it’s nice to have that peace of mind.
3-6 months expenses is my current target for this fund.
Home Repair Fund
If you have a house. Things are going to break, so it’s nice to allocate a percentage of your rent toward an expense fund for the inevitable.
Vacation Fund
Start saving for your trip to Japan, South America, and Europe one paycheck at a time.
Don’t be the backpacker hippie who racks up massive credit card debt for a few epic trips and then is paying it off for the next 5 years (This is actually surprisingly common).
Fun Fund
Set aside money to spend with the boys or a weekend getaway with the significant other.
You could have a debit card that you use exclusively for this account. And if you don’t allow overdrafts then you don’t have to worry about waking up after a weekend out and wondering why you spend $80 on Long Islands at Lou’s.
Car Fund
The old trusty stag is going to break down eventually. So it’s a good idea to be stashing away pennies for when that sad day inevitably comes.
You could also use this fund for car maintenance.
Shopping Fund
You can really create as many funds as you would like. I would start out with 1 or 2 and work up from there. You don’t want to overdo it from the start. Once you get this all set up it’ll definitely be hard to reduce your current level of living. Embrace it and let the hedonic adaptation work its magic.
In Summary
Incorporating automated savings into your financial plan can help improve your overall financial situation by making saving money a consistent and automatic habit, and by promoting other positive financial behaviors.
Automated savings can be used to save for short-term goals, such as an emergency funds, or long-term goals, such as retirement or a down payment on a house.