Pay Yourself First With Automatic Savings

It’s all too easy to let life’s expenses consume entire paychecks. Loan payments, day-to-day spending, mortgage or rent payments, and other costs can sometimes distract us from contributing toward longer-term financial goals. Some may want to save an emergency fund to avoid credit card debt for an unexpected bill. Others may wish to contribute consistently to a retirement or brokerage account to build wealth for the future. Either way, automating your savings plan can pay dividends.

Rather than wait for a windfall or tax refund to kickstart a savings plan, one option is to use payroll deductions or automatic checking to savings transfers to get started. Even small amounts consistently saved can make a real difference over months, years, and even decades.

This hands-off approach is the cornerstone of the “pay yourself first” philosophy. Automatically redirecting income towards savings flips the script on how many people think about saving for the future – rather than waiting to have “extra” money to save, daily spending adjusts to after-savings income.

Starting Small? No Problem

Making ends meet on less money may seem challenging (and for those experiencing financial hardships, it indeed may). However, saving amounts that may seem trivial can grow substantially over a longer time horizon. For example, those hoping to save an emergency fund may find they can get by while saving $25 per week. But over a year, that adds up to $1,300 – a substantial cushion against unplanned expenses and potential credit card debt.

For those saving for retirement, investing just $10 a day starting at age 25 may grow to over $1 million by age 65, assuming an 8% average annual return. Even $3 a day amounts to nearly $350,000 using the same assumptions.

The benefit of automatic savings is that you can start with an amount manageable for you now, increasing over time. Like the saying about the best time to plant a tree (“20 years ago”), there’s no substitute for the power of time to grow money through continual contributions and compound interest.

How to Get Started

The tools will vary based on your employer and financial services provider. Still, the concept is the same – rather than keeping all of your money in a checking account and allocating different amounts to savings when you happen to think about it, the money is automatically redirected immediately.

If supported by your employer, one approach is to use payroll deductions to allocate your income to different accounts. For example, 80% of income may be routed to your checking account, 10% to an emergency savings fund account, and 10% to a retirement account. Of course, the exact percentages will vary based on your income, expenses, and other considerations unique to your situation.

For those who are self-employed or work for employers who don’t support payroll transfers, a typical checking account can be set up to accomplish a similar result. They can set up monthly checking to savings transfers to build an emergency fund. For retirement savings, a brokerage account can be set up to schedule withdrawals monthly on a pre-determined date.

The Takeaway

Like setting up automated bill payments, automatic savings requires understanding your monthly cash flow to avoid potential overdrafts. But one advantage of automatic savings is that you can start with any amount that’s comfortable for you. The important part is to get started and then reevaluate your savings target over time.