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.
Tangible proof.
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:
Working out.
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.
Eating well.
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?
These so called automatic saving plans only work up to a certain point. While *MOST* people are *NOT* disciplined about various things, there are few of us that had severe lengthy things happen to us pretty early in life that has sent us in the other direction, myself included in that boat. Having literally lived in survival mode for a period of 9 years (some of that time strictly on Child SSDI income only) with an annual income of no more than $4,000 in the 1990’s.
Back then, it was okay for me to live in an efficiency apartment with NO A/C with summers being 95F with 95% humidity and smog alert, can only afford to get around via a mountain bike as I couldn’t even afford the bus system at the discounted rate. The only thing that pulled me through was me being in really good cross country running shape along with the biking I done.
Why was I on Child SSDI for so much time? I use to have epileptic seizures until I had the laser brain operation done on July 22nd, 1991 with the last semi-seizure being on July 24th, 1991. Been seizure free ever since. Now during that summer of 1995 living on $4,000 annual income after having been cut off from Child SSDI (Even though the rep told me while I was still in high school, I wouldn’t be cut off until after I had graduated from college for as long as I stayed in college, but that obviously wasn’t true given I was forced to have to retake my first 2 years of college all over as none of my credits from the 2 year college transferred), as I was sitting there on the floor having to drink 1.25 gallons of water based drink daily just to keep hydrated, which as I was drinking, my body was literally just sweating it right back out, I was like, it’s okay for me to have to live like this now days while I’m in pretty good shape, but I certainly don’t expect to be living like this as an elder when I’m retired from work. Bear in mind, that was what went through my mind one specific say while going into my senior year of college.
As for retirement savings, automatic saving does work to a certain point, but not fully. I say this cause there are such things as seasonal effects and there are such things as other emergencies. Ever since I lived on my own, I have always went by a budget. It initially started out on paper, but as time progressed, it got to be too complex to do on paper, so initially I attempted to take short cuts realizing the risks, and those risks did happen as I got bit pretty hard that same year. As such, in July 2001, I converted everything from paper form to Excel utilizing my computer software skills to get it all set up. It was also in 2001 when I did the self study on retirement along with the various risk factors both during retirement years and employment years using the 3 standard deviations or 98% confidence interval for determing what was needed to be done financially to live relatively comfortable in retirement. Given I had such a late start in life, I also had to plan my retirement date as such to also be late, which in this case to be when I’m 70 years of age.
Initially, the result of the study indicated I would have to put 25% of “Actual Gross Income” to retirement savings (this includes the employer’s matching policy as that counts towards the 25% goal, but it also must be included in “Actual Gross Income”). However, due to live circumstances, that was obviously not realistic, so I ended up having to come up with a compromise. As such, I came to terms, the 25% would stick, but it wouldn’t necessarily have to be to retirement funds, but rather it could also go to 2 other areas, debt reduction and net emergency fund contributions.
Now, with this 25% saving rule in place, would automatic saving plan work for the full 25% goal? I hate to say it, but the answer is a resounding “NO”.
What would work then?
I don’t know about you, but how many times do people say something came up just as they think they got ahead with something else?
Did those other items really come up, or did they just come into their radar rather if it’s cause those other items were cleared off their plate or if the time to pay for those items came a lot closer?
It’s this very reason why I don’t just put things into equal automatic savings, but rather I use the cash flow management worksheet within Excel to catch those sitautions. You have 2 types of things going on.
Do you have cash flow demands and cash inflow that are seasonal basis only? Most of us do and I know I have a very significant amount of this taking place, thus one reason why the automatic saving plan doesn’t work for me.
Do you have something that may have changed your financial picture, which means you have to make an adjustment to your cash flow management worksheet? There are times when this does happen. True, there are times when we plan it ourself, but there are times when we didn’t plan ourself, but rather it was lunged onto us.
As such, I use the following:
Automatic savings:
Debt Reduction: All debt payments are paid by the due date at the appropriate amounts. Credit card debt is not an issue given the new balance amount is paid in full by the due date every single month, even though this isn’t technically automatic by the strict defnition, but it is via the cash flow management worksheet.
Retirement Savings: This works with the employer but I only use it to the extent of maxing out the employer’s matching policy given the high fee of such retirement accounts relative to the low fees of the ROTH IRA’s and regular annually taxable accounts don’t have near the high fees as the employer’s 401(k) plan. Employer’s retirement plan works out to be about 2% of assets annually when comparing performances to relevant market benchmarks.
Manual Savings:
Contributions into ROTH IRAs are typically done with the IRS tax refund given I can’t play the break even game with the IRS based on our set of circumstances with the rules of the IRS.
Further debt reduction and emergency funding is also done via the cash flow management worksheet utilizing a 0 budget type plan. Note, I use Excel, not the paper version as Dave Ramsey would have us do. The reason why I do it in Excel, the daily numbers change automatically while on paper, I would have to recalculate all of those things.
Why do I mention so much about the cash flow management worksheet within Excel?
First, I don’t like being taken by surprises. Second, I don’t like having to do a bunch of extra work that could be avoided. As such, I put in the numbers and as I do that, Excel calculate out the results for me automatically. Granted I had to setup the formulas myself, but that’s no issue to me given I am about as advanced of a computer user as one could possibly be.
Third, I don’t like the idea of someone else eventually taking control of me. As such, I must take control of our financial picture and do what ever I can, so as to avoid that boat that I was in during the 1990’s. Obviously, I may not be able to prevent all things (thus one reason why I used the 98% CI or 3 standard deviations in that retirement self study as there is no such thing as a guarantee in life, but also given it’s major importance in life thus why I went with the 98% CI instead of the 95% CI), but I like to spot the potential financial storms on the horizon and address them well in advance of time, so as to minimize their impacts to us. It’s via this cash flow management worksheet that has allowed me to meet that 25% countable saving goal despite raising a family of 7 (my wife, 5 girls and myself) with our annual income below median level for the area.
Kristia,
I’m 40 now, which I made up a lot of ground since my 20’s. Now when I was in college, I couldn’t save any cause I didn’t have sufficient income to be able to save. Hecks, I was considered an under-reporter far too long with regards to the IRS taxes to the point, I was audited in 1997. Good thing I had copies of my W-2s as it didn’t take long to prove my case, but I still had to follow through for those 9 years I was being audited for (tax years of 1988 through 1996).
In my case, it was a full blown case, I had to increase income before I could even consider saving anything outside of just getting by scrapping what ever I could scrap.
You know, each and every year that goes by, things just get that much easier for me. I absolutely hated elementary school years. Junior high was no better. High school was somewhat better, but still really bad. College was better in that I no longer had to deal with the physical daily beatings only to get told by the officials to either ignore it or they didn’t want to hear it as beatings at the college level resort to criminal levels now by that time, students are generally of legal age. However, it was still not too good. Initially, even employment years weren’t too good, but yet, it was still easier than college years. Once income went up significantly to the point I was no longer just scraping by, it once again got easier, but still had a long ways to go. However, that was the first time when I could really start working on the debt and saving issues, which was in 2001. Since that time, it’s only been getting easier for me.
As for my worst year ever, I would have to say it was my 4th grade year with the severe beatings by other older bigger kids on school grounds only for the school officials to tell me to ignore it and they didn’t want to hear it. 7th grade though wasn’t much better other than at that point, I was better equiped, but still no help from any of the adults. When I went to defend myself, I was not only punished by the school officials with the other 2 kids getting off scott free, but also by my guardians as they would not listen to me (Or if they did, they certainly didn’t believe me).