An automatic savings plan can turn goals into reality
We get it – saving isn’t the most exciting way to manage your money, especially when you’re just getting started. But that doesn’t change the reality that saving is a crucial part of reaching your personal finance goals. All it takes is a plan.
In this post, we’re going to outline just how powerful an automatic savings plan can be for your financial goals. Getting started can come down to implementing one of the following two methods:
- Goal-focused – The goal-focused savings method means that you define a specific item you are saving for and then set a specific time period in which you will reach the savings amount necessary to achieve that item. This could be something like a vacation or a high-end television. For example, if you were saving up for a $2,400 vacation and wanted to do that in a year, then you would need to save $200 a month (i.e., transfer $200 a month from your checking account to your savings account). Using the goal-focused method is a great way to prove to yourself that you can start a savings plan, stick to it, and be rewarded for hitting your goals.
- Nominal amount savings – The nominal amount savings method is where you take an amount that you would spend on a regular basis and automatically transfer it to a savings account. For example, think of a subscription payment of $9.99 a month or a Starbucks reload amount of $20. For most people, these purchases are made subconsciously – we’re not thinking about how every minor subscription payment factors into our budget. By understanding this, it can be easy to take a similar amount that would essentially go unnoticed and add it to your savings account each month automatically. For long-term success with this method, try to increase the amounts over time and watch your savings grow.
Regardless of the method you select, the key is to start saving and to stick with it. One of the simplest, most effective tools for making savings goals a reality is an automatic savings plan.
How an automatic savings plan works
An automatic savings plan is typically carried out one of two ways: either the saver's employer deducts a certain amount from each paycheck that's then deposited into a savings account, or the saver’s financial institution transfers a set amount from their checking account into a savings account on a routine basis.
One benefit of having the amount transferred out of your paycheck to your savings account is that you tend not to “see” the money leaving your checking account. For many people, their checking account is viewed as the money they can spend, which makes it harder to move funds out to a savings account. If you can relate to this, consider having the funds taken out of your paycheck to stay on track with your savings plan.
The reality is that both options will allow you to meet your savings goals; it just depends on which option is best for you.
The frequency of your automatic savings
One part of creating an automatic savings plan that isn’t often discussed is the frequency of savings. The frequency of contributing to your savings is generally oriented around two aspects:
- Pay cycles – If you are paid on a weekly basis, then it can often be easier to simply set your savings goal to be defined on a weekly basis as well. If you are paid bi-monthly, then it might be easier to define your goal on a monthly basis.
- Amount you define for transfer – If you find that the nominal savings method works best for you, then you might choose to use the weekly frequency as the amount of money could be smaller. For example, if your goal is to save $100 a month, then you only need to set aside $25 a week to maintain the pace of savings to hit your monthly goal. But if you’re comfortable moving $100 into your savings account all at once on a monthly basis, that works, too. Always define your savings goals by a frequency that makes you most comfortable.
Why automatic savings plans work
There are countless incentives for enrolling in an automatic savings plan. Four common reasons include:
- Simple saving – While many people won't stick with a financial plan that's too complex or difficult to achieve, automatic savings plans are easy and require little effort to maintain. The key to sustaining a savings goal is to make it as uncomplicated as possible.
- Easy growth – Once savers become accustomed to saving automatically, they often don't notice the small sum leaving their paychecks or checking account. In time, automatic savers reap the rewards for their consistency. Putting aside $50 a month, for example, adds up to $600 a year or $3,000 after 5 years – think of it as a gift to your future self.
- Time management – As the old saying goes, “time is money,” and an automatic savings plan conserves both. Much like auto-paying utility bills, for example, automatic savings plans remove the work from transferring money each pay period. It also helps prevent savers from spending money on an impulse buy instead of putting it toward their longer-term financial goals.
- Proven results – People have been enjoying the success of automatic savings since the 1970s when these plans were first introduced.
