How To Automate Your Savings (original) (raw)

Automating your savings is as simple as setting up direct deposits or recurring transfers into your savings account. It’s the easiest way to ensure you consistently set aside a portion of each paycheck for all of your short-term or long-term goals — whether that’s saving for a vacation, an emergency fund, a wedding or a down payment on a house.

In this article, we at the MarketWatch Guides team explain automatic savings plans and the types of plans you can choose from. We also offer tips for automating your savings.

Key Takeaways

• Automating your savings typically involves setting up recurring transfers from one account to another, such as a checking account to a savings account.
• Automatic savings is easy to set up and it can help you reach your financial goals faster without much effort.
• To get the most out of automatic savings, set clear goals, use multiple accounts for different goals, use employer-sponsored savings programs and adjust your plan as needed.

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What Is Automatic Savings?

With an automatic savings plan, you set a fixed amount of money to automatically transfer from your checking account (where your paycheck is usually deposited) to a separate savings account on a regular basis, such as every payday or once a month. You’ll choose how much money you want to transfer, when you want to transfer it and how frequently you want to transfer that amount. You’ll then set up an automatic transfer with your bank through your online account or by contacting your bank.

The advantage of automatic savings is that it makes saving money a habit. You won’t have to remember to transfer money manually or be tempted to spend it on something else. The money is saved for you without any extra effort, and your savings grow over time without you having to think about it.

Alternatively, many employers let you split up your paycheck into separate accounts when using direct deposit. That way, you can designate a portion of your paycheck to go straight to your savings account, separate from your take-home pay. This is similar to when your employer takes 401(k) contributions out of your paycheck before it gets to you.

Benefits of Automatic Savings

Automatic savings plans have several advantages for anyone looking to save more money and create good savings habits.

• Convenience: You don’t have to remember to manually set aside money each time you get paid. With an automatic savings plan, you set it up once and let it run in the background.
• Easy to set up: You can usually set up an automatic savings plan directly with your bank or through your employer.
• Helps curb spending: When the money isn’t in your account, you may be less tempted to spend it.
• Helps with goal setting: An automatic savings plan can help you with setting and reaching your goals since you won’t need to remember to transfer money or figure out how much you need to save on a regular basis. You’ll set up your targets and let your plan do the work for you.

How To Automate Your Savings in 5 Steps

There are a few ways you can automate your savings. No matter which way you choose, you’ll usually follow these steps.

1. Determine Your Savings Goal

First, decide on a savings goal, including a deadline for that goal. Then, calculate how much you’ll need to save to reach that goal. For instance, if you want to have 1,000inanemergencyfundinfivemonths,you’llneedtosave1,000 in an emergency fund in five months, you’ll need to save 1,000inanemergencyfundinfivemonths,you’llneedtosave200 per month to reach that goal.

2. Choose a Savings Account

Once you figure out a savings goal, you’ll then need to figure out where to store your money for that goal. A high-yield savings account (HYSA) or a money market account (MMA) are great options to consider since they both provide security, accessibility and interest. Also, consider if you want multiple savings accounts for different goals.

Look for an account that doesn’t charge a monthly fee, doesn’t require a minimum initial deposit and doesn’t have a minimum balance requirement for earning a high interest rate. Also, look for a competitive annual percentage yield (APY). While the national average rate for savings accounts is 0.46%, the best high-yield savings accounts and money market accounts offer 4% APY or more.

3. Figure Out a Transfer Frequency

Next, choose the right frequency amount for your automatic transfers, such as lining up your transfers with your paycheck. If your goal is to save 200permonthandyougetpaideveryotherFriday,youmightsetupatransferof200 per month and you get paid every other Friday, you might set up a transfer of 200permonthandyougetpaideveryotherFriday,youmightsetupatransferof100 every two weeks. Alternatively, you may want to set up weekly transfers or one transfer per month, such as on the first day of the month.

4. Set Up Automatic Transfers

Once you figure out your frequency, set up automatic transfers from your checking account to your savings account. This is where you’ll set up your savings plan according to your preferences. Generally, banks will let you set up recurring transfers from one account to another using their online platform or mobile app.

1. Sign in to your online banking or mobile banking account.
2. Look for the transfer option in your account menu or settings. Select the internal transfer option if you want to make a transfer from one account to another with the same bank. Choose the external transfer option if you want to make a transfer from one bank to another bank.
3. If needed, link the two accounts by providing your external account information.
4. Then, set up automatic transfers. Choose the account you’re transferring money from and to, how much you’re transferring and how frequently you want to transfer that money.
5. On the scheduled date, the bank will automatically move the money from one account to the other account. The process will repeat at your chosen frequency (such as every month or pay period) until you modify or cancel it.

Alternatively, you can also update your direct deposit information with your employer so your paycheck is split automatically between your checking and savings accounts. With this method, the money you’re saving will never hit your checking account, so you may be less tempted to spend it.

5. Adjust Your Savings Plan As Needed

Adjust your automatic savings plan as needed. If your income or expenses change, you may need to update your transfer amount or frequency.

There are many types of automatic savings tools available. You may need to experiment to find what works for you, but popular options include:

Bank-Provided Automatic Transfers

Most banks let you set up recurring automatic transfers from one account to another with the same institution or a different one. It’s the easiest way to save money without any additional tools or apps.

Pros

Easy to set up

No extra cost

Can choose your preferred frequency and amount

Cons

May have limitations on how many transfers you can make to a savings account

No advanced tools or features

Employer-Sponsored Automatic Savings Plans

Some employers offer the option to automatically deduct a portion of your paycheck and deposit it into a savings account or retirement plan such as a 401(k). You usually set up these transfers through your payroll department.

Pros

Money gets directly deposited into your designated savings account.

You won’t be tempted to spend all of your paycheck.

For 401(k) accounts, your employer may match some contributions.

Cons

They’re more difficult to set up than a bank transfer.

They may be harder to modify if you need to change the amount or account information.

Savings Apps

There are money-saving apps that can help you automate your finances such as Empower, You Need a Budget (YNAB) and Qapital. These apps typically connect to your financial accounts and use algorithms to determine how much you can afford to save based on your income and spending habits. Then, you can typically set up an automatic savings plan through the app.

Pros

Good for budgeting and maintaining control of your finances

More features than other automatic saving options

Cons

May charge monthly or annual fees

May require you to share your financial information with a third-party app

Round-Up Tools

Some financial institutions, such as Ally Bank and Chime, allow you to automatically round up your purchases to the nearest dollar and transfer the spare change into a savings account.

Pros

Allows you to save small amounts of money, which can add up over time

Doesn’t require major lifestyle changes

Cons

Saving small amounts may not be enough to fund larger goals

Likely need to supplement with other automatic savings plans

How to Maximize Your Automated Savings

No matter which type of automatic savings plan you use, you can make the most of it with these tips.

Specific and measurable goals will help you determine how much you need to save and keep you motivated. They’ll also help to increase your odds of reaching your goals.

Life happens and your income and expenses are bound to fluctuate. When they do, adjust your automatic savings plan to fit your lifestyle.

If you don’t mind managing multiple bank accounts, separating your savings into different accounts for specific purposes can help you stay organized and track your progress more easily. You may choose to have separate accounts for emergency savings, vacations and life changes such as buying a home or having a baby.

Some savings accounts allow you to categorize your account according to different goals without having to open separate accounts. For instance, Ally’s online savings account allows you to use savings buckets to split up your account into different categories.

If your employer offers a 401(k) or another type of retirement account with matching contributions, enroll and contribute enough to receive the full match. This is essentially free money for you to use later on.

FAQ: How To Automate Your Savings

The best tools for automatic savings depend on your preferences and personal finance goals. If you’re looking for institutions with round-up savings tools, look into institutions such as Chime or Ally Bank. If you simply want to put your savings on autopilot, set up recurring transfers from one bank account to another account.

Automating your savings can be worth it if you want to save money consistently without putting in much effort or thought. Even if you have the best intentions, it may be difficult to remember to transfer funds or save enough money. It’s often best to automate the process so you have one less item on your to-do list.

Yes, it’s possible to overdraft with an automatic savings plan if you set up a transfer amount that’s more than what you have available in your checking account.

“There is the risk of incurring overdraft fees if you automate too much money from your checking account into your savings account,” said Robin Growley, head of consumer deposits at Bank of America. “However, you can avoid this by erring on the side of saving less at first and increasing the amount over time, as well as by setting up alerts that notify you when your checking account balance is low.”

*Data accurate at time of publication

Editor’s Note: Parts of this story were auto-populated using data from Curinos, a research firm that collects data from more than 3,600 banks and credit unions. For more details on how we compile daily rate data, check out our methodology here.