One of the most important lessons I learned in my quest for financial freedom is how important it is to use an automatic savings plan to build wealth. I was never truly successful at saving significant amounts of money when I was younger because I didn’t use an automatic savings plan. I learned that no matter how good my intentions, something always seemed to come up that prevented me from saving like I wanted to, and this happened almost every single month! By the time I was in my mid-20’s (and around the same time I started this blog) I had had enough. I picked up some personal finance books, decided it was time to make a change and have never looked back.
How I used an automatic savings plan to meet my goals
At this point in my life I’ve managed to save six months worth of expenses in an emergency fund, pay off several student loans, put away a sizable amount of money for a trip to Australia, save enough for a down payment on a house and pay off an auto loan. Of course the examples I’ve mentioned aren’t all necessarily related to paying yourself first, but the same principle of automating your finances can be applied to just about anything: saving, paying off debt, etc.
Let’s focus on the big kahuna: creating and sticking to a savings plan
Paying yourself first (meaning putting money away every single paycheck for you before you pay any bills) is a great concept. After all, you work hard for your money, some of it ought to go towards you. However in theory it’s not always so easy to do. After all if you make $1,000 a paycheck and $900 of that has to go towards bills and your other living expenses, leaving you only $100 a month of “mad money” you’re not likely to put that money into savings. Most people wouldn’t. You’re not likely part of the small minority that would. So how do you save when you find yourself in a situation like this? It’s all about prioritizing and automating.
You’ve got to make it automatic
You’ve got two choices when it comes to automating your savings. You can set up direct deposit so a portion of your paycheck goes straight into a savings account without you ever having to make a choice on if you are going to spend it or not. This is the ideal choice, as you never have a chance to spend the money because you never get to see it. The other choice is to establish a “bucket account” (make it a checking account so you don’t get hit with any regulation d fees) where you set up automatic transfers to each of your different sub-accounts. A bill pay account, a spending account, your savings accounts, etc.
Neither way is difficult to set up and whichever option you choose shouldn’t take any more than about an hour of your time. You can establish an online savings account with ING Direct, for example, in 20 minutes or less. Updating your direct deposit, once you’ve decided on how much to save, should be as easy as calling your HR department or updating it on your company intranet. This should take 5 minutes or less. Setting up automatic transfers from your bucket account to your various sub-accounts shouldn’t take more than 20 minutes either.
Let’s review shall we? Here are the steps you should take to set up an automatic savings plan to build wealth:
- Open an online savings account, or if you prefer a physical presence, an account at a local credit union
- Decide how much you want to save every paycheck
- Set up direct deposit into your new savings account [or]
- Establish a bucket account and sub-accounts for bills, savings, spending money, etc.
- Watch your money grow
Welcome to the savers’ club
Now that you’ve automated your savings it’s just a matter of sitting back and waiting for the money to start building up in your accounts. It’s an extremely gratifying feeling watching your virtual piggy bank get fatter and fatter. 🙂 The great thing about automating your savings this way is once it’s established you have virtually zero upkeep, meaning more time for football, your favorite TV show or making more money through freelancing! The only thing you have to do at this point is to not screw up. Don’t touch your savings, except for what it’s supposed to be used for (emergency fund or otherwise). It’s amazing how much wealth you can build in a relatively short period of time.
How have you been successful in using an automatic savings plan? I’d love to hear about your experiences so leave me a comment below!