Anyone who has ever tried to pinch a penny knows that saving money is easier said than done. (A lot easier.) Especially in tough economic times, many people face competing demands on their funds. Nest eggs are all-too-easily whittled away by bills, debts, unexpected expenses and unplanned indulgences.
That’s why creating an automatic savings plan—where your money is transferred directly to a savings account on a set schedule—can be a powerful tool to help you put away money. After all, if you’re manually transferring money into a savings account, you might find a new reason each month to skip that transfer. Automatic transfers, on the other hand, remove a weak point from the process: you.
“Our minds are really good at making excuses when it comes to saving,” says Melanie Lockert, founder of Dear Debt and a financial writer and author based in Los Angeles. “We tell ourselves we can’t afford to save, or ‘I’ll do it later.’ We self-sabotage.”
What is an Automatic Savings Plan?
An automatic savings plan is a type of personal savings system where you automatically transfer a specified amount into your savings account at a particular time, a time that you can select.
Automatic transfers make achieving our savings goals easier by reducing the amount of self-discipline involved in the process. “Saving automatically can get rid of the excuses, the mental tension and the legwork we have to do in order to save. And that helps you stick to the actual goal,” says Lockert.
From her own experience, Lockert knows how effective an automatic savings plan can be. She successfully paid off more than $80,000 total in student loan debt, the bulk of it in less than five years. One of Lockert’s key strategies, she says, was committing to saving—even when she was pulling in very little income and trying to pay off debt. “When I was in my early 20s and working my first full-time job, I just started saving a hundred bucks a week,” Lockert says of her first use of automatic transfers. “I didn’t look at the balance until a year later, and it had already amounted to several thousand dollars.” Seeing your money grow without actually having to do anything—without, as Lockert says, “feeling the pain of saving"—can be really beneficial.
Ready to set up automatic deposits to a savings account? Here’s how to get started.
How Does an Automatic Savings Plan Work?
The process is simple: You set up an automatic transfer so that at a time period of your preference—biweekly or monthly, for example—a percentage of your paycheck or a predetermined dollar amount moves automatically into a savings account. That could be a savings account at the same bank where you currently have your checking account. Or it could be at a separate financial institution.
If you’re looking for a savings account at an outside financial institution, there are plenty of options. In fact, you might consider opening a high-yield savings account to help you along your way.
As for how much to save, Lockert advises starting with your net income—the amount of money hitting your account after taxes and deductions—subtracting your expenses, and then determining what wiggle room your budget has for savings. (A word to the wise: If you don’t have a budget, now is the time to build one and to prioritize savings when you create it.)
How Do I Set Up Automatic Savings?
Automatic savings takes two forms:
1. Account transfers
2. Direct deposits.
If you have a checking account at a bank, you can open a savings account there as well and link them. You can then set up an automatic, recurring transfer to move money between the accounts. Or, if you’re paid by direct deposit, you can have a portion of each paycheck automatically deposited into your savings account. (You can also set up direct deposits to an individual retirement account.) If you’re self-employed, you can determine the right timing for your transfers. A quarterly transfer, for example, might make more sense for your cash flow.
You can also save with a second financial institution (or several) in order to take advantage of lower fees, promotional offers and savings products with more favorable interest rates. Having your savings at a separate institution also creates the idea that your savings are truly separate from money you’ve earmarked for spending. “There’s another layer of separation,” says Lockert. It can prevent you from ping-ponging your money between savings and checking accounts at the same bank, she says.
Almost every bank or credit union will allow you to transfer money from one bank account to another, even if one of those accounts is held at another financial institution.
To link to an external bank account, you’ll need the following four things:
1. Bank name
2. The bank’s location
3. An ABA routing number (you can find this nine-digit number in the bottom left-hand corner of checks and deposit slips, or contact your bank to provide it)
4. Your account number
Benefits of an Automatic Savings Plan
Whichever way you construct it, the “set-it-and-forget-it” strategy of an automatic savings plan offers a couple advantages.
First, you’ll build the good financial habit of saving regularly, but without putting in a lot of effort. And second, since the money never hits your checking account, you’ll never miss it—reducing the temptation to spend what you should be saving.
Who Is an Automatic Savings Plan Right For?
If your rainy day fund is nonexistent, or you only add to it intermittently, automatic savings plans are a great way to build a steady saving habit. Instead of waiting until you’ve scraped a little money together to put it away, you create an automatic transfer for each payday. That way, saving is, by default, your financial priority—and one you’ve budgeted for. (An added benefit is that your automatic transfer will always occur when your account is sufficiently funded for it, avoiding accidental overdrafts.) And it doesn’t have to be a huge amount. “Even if you’re having a hard time and struggling, the important part is building the habit,” says Lockert. “Just put away $5, $10 or $20.”
If you’ve developed a steady saving habit and your automatic savings plan is working without a hitch, Lockert recommends not letting a “set-it-and-forget-it” strategy turn into an excuse to completely ignore your money. “If your financial situation changes—if you start making significantly more money, for example—reevaluate with a yearly or quarterly checkup,” she recommends. “Ask yourself: Can I put more away?”
Especially as you face big life changes, such as marriage, divorce, having kids, buying a house, being furloughed or getting a new job, it’s important to have checkups that will help inform your automatic savings strategy, Lockert says. Regular money checkups also give you agency in your savings plan. “You can continue to reevaluate and shift as you go,” she says.
Can an Automatic Savings Plan Help Me Reach My Financial Goals?
Whether it’s building an emergency fund, saving for retirement or putting away money for a no-expenses-spared honeymoon, an automatic savings plan can help you reach your financial goals by putting the priority on saving money and automating the process.
Once you’ve begun automatic savings transfers on a routine basis, you’ll hardly notice the deduction from your bank account. Automatic deposits are a great way to build an emergency savings fund or to save for a goal purchase, such as a vacation or a new home. Perhaps best of all, automatic savings strategies are easy to put in place, fit seamlessly within a well-thought-out budget and help you meet your financial goals.
Lockert recommends divvying up your savings by creating targeted accounts for saving automatic deposits for each goal.“You might have a different savings account for taxes, for an emergency fund or for a vacation, so that you know exactly what that money is for,” says Lockert. That way, you never feel so flush with cash that you dip into your funds and undermine your goal. “I will admit when I was younger and building an emergency fund, having a general savings pot didn’t help me,” she says. Finding herself transferring money to checking too frequently, Lockert opted to nickname her accounts, so she’d know precisely what the money was for and not be tempted to spend it. Ultimately, that helped her meet her goals.
Of course, that also brings home the importance of having financial goals in the first place. “I tell this to people paying off debt all the time: It’s really important to know why you’re saving,” says Lockert. “If you don’t have a why, there’s no motivation.” But once those goals are in place, an automatic savings plan might be just the tool to help you achieve them.
Julie Anne Russell is a Brooklyn-based freelance journalist. She writes on personal finance, small business, travel and more.
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