Personal finance experts often praise the idea of automated savings– the idea of automatically having money deducted from your paycheck straight into the savings vehicle of your choice. This system is often promoted because it works for many reasons. The obvious reason being that when we set something on auto-pilot we tend to forget about it and let it just go on.
I mean, who wants to manually deposit money into their savings account every payday? This is money that you could use on a million different things (drinking, new shoes, new iPhone) and you have to manually send it away to some account and not see this money until some point down the line. It just doesn’t work for our generation. Automatic paycheck deductions or automated savings work because you don’t even see the money.
My automated savings story.
I’ll keep this short. Back in 2005 I signed up for an automatic savings plan. Every two weeks I would get $25 deducted (I raised it to $50 eventually). I also took out money once when something came up. I essentially treated this as an emergency fund at the time. Last month I started wondering about how much money I’ve accumulated in this account. I finally got my annual statement balance the other day. I was really curious to see how much money I had saved in this account by this point. To my surprise I had just over $4,300 in this account (a Canadian Savings Bond if you must know). That’s not a huge sum of money and I definitely won’t be retiring any time soon. However, this is money that I passively saved over time and I now have access to over $4,000. This is likely money that I would have spent on something pointless over the years.
Now that I shared my story on automated savings, let’s answer the fundamental question: What do you have to do for automatic savings plans to work?
Set it and forget it works.
The only way for automated savings to work is if you set it and forget about it. It really is that simple. You fill out the proper paper work once and then let the money slowly accumulate.
Ignore the details.
The interest rate sucks. It’s a savings bond so the rate of interest isn’t even worth mentioning. Many will be quick to point out that I could’ve invested this money into any other savings vehicle. That’s not the point here. The point that I want to get across is that you need to ignore the details and allow yourself to let things happen. The more options we have the less likely we are to do anything at all. So stop worrying about hot stock picks and investing trends.
Don’t use as your main savings.
My belief is that automated savings plans work best when you allocate a small amount of money to them. Saving 4 grand in almost 6 years isn’t anything special. Saving 4 grand without even thinking about it is pretty cool on the other hand. You can have your main savings account (or sub-accounts) but I feel that you should allocate a small amount of money into a totally separate savings account. Oh and I should probably mention that automated savings plans usually work best with the retirement accounts that you can setup through your employer.
Receiving my annual balance is tangible proof that I’m making positive decisions with my money (at least sometimes). Without a tangible reminder you might lose focus or give up on this strategy. By reminding yourself of where your money is going it keeps your eye on the prize.
Hopefully by now I’ve convinced you on the idea of automated savings plans. Just in case any part of this post didn’t feel like it resonated with you, I wanted to compared automated behavior/going on auto-pilot to the other common topic of personal fitness:
We all create ridiculous excuses for not working out. Some of these excuses are creative (not having gym clothes washed), while others are just plain lame (no motivation). By creating a system where working out is automatic (having a workout buddy or hiring a personal trainer) we force ourselves to meet our fitness goals.
The main reason that most of us don’t eat well is because we don’t keep “good” food around us. If you have a bag of chips around you, you will eat that bag of chips. If you go to the grocery store and only buy healthy food (beans, chicken, egg whites, etc.) then this will be what you eat when your stomach starts grumbling around noon time. When your kitchen is filled with junk or you don’t have any food at home you’ll simply eat what’s convenient. This usually ends up being junk. The simple action of making a conscious decision to only buy “healthy food” ahead of time will allow you to automate your ability to eat well consistently.
Now as I conclude this piece, I really want to ask you guys: Do you have any personal stories on setting your finances into auto-pilot that you would like to share with us?